Opinion
Nos. 45477, 45478.
February 1, 1943.
Hiram M. Nowlan, of Janesville, Wis. (Otto A. Oestreich, of Janesville, Wis., on the brief), for plaintiff.
Elizabeth B. Dairs, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Proceedings by Florence P. Blackman and by Bernard M. Palmer against the United States of America on claims for refund of estate tax paid.
Petitions dismissed.
These cases having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Plaintiffs, Florence P. Blackman and Bernard M. Palmer, individuals, are residents of California and Wisconsin, respectively, and are the daughter and son, respectively, of William F. Palmer, deceased.
2. William F. Palmer (hereinafter sometimes referred to as the "decedent") died in California February 1, 1933. Florence P. Blackman, as administratrix of the decedent, filed an estate tax return January 24, 1934, showing a gross estate of $171,577.79 and deductions of $151,695.09, which, with the specific exemption allowed, resulted in no net estate and no tax due. Under a schedule in that return dealing with the transfers involved in these proceedings, the following explanation was given of the date, amount or value, and motive which actuated the decedent in making the transfer: "Jan. 14, 1924, $250,000, Love and affection — Transfer made by Trust in which decedent retained portion of income not taxable under Act [Art.] 18, Reg. 70 because made prior to March 3, 1931; Copies of Trust Agreement submitted herewith."
3. After an examination of the estate tax return, the Commissioner, on December 14, 1936, advised Florence P. Blackman, as administratrix, of a deficiency in estate tax of $159,486.89. In arriving at that deficiency, the gross estate was increased by the amount of $1,205,957.11 with the following explanation:
"It appears that on or about January 14, 1924, the decedent, William F. Palmer, transferred to certain trustees (of whom the decedent was one) property of the value on the date of decedent's death of $2,411,914.21; that the property so transferred was substantially all of decedent's property and no definite plausible motive has been shown; that it was provided in the instrument of transfer that the decedent should receive one-half of the income during his lifetime; that it was further provided that the trust might be terminated by the consent of the trustees and all of the adult beneficiaries who were at the time entitled to receive the income; that it was further provided that on such termination the principal of the trust estate was to be distributed among the persons entitled to share in the income, the principal to be distributed among such persons in the same proportions in which they were entitled to share in the income; that on or about November 23, 1928, the trustees and adult beneficiaries enjoying the income (decedent being and having been at all times since the creation of the trust, one of the trustees and an adult beneficiary enoying one-half of the income) terminated the said trust (upon which one-half of the principal became the property of the decedent), and directed in the notice of termination that the principal should be delivered one-half each to the other two adult beneficiaries, Bernard M. Palmer and Florence P. Blackman, and thereupon, and on the same date and as part of the same transaction, the said Bernard M. Palmer and Florence P. Blackman reconveyed the same property to the same trustees by an instrument containing substantially the same provisions as the trust instrument of January 14, 1924, including the provisions for payment of one-half of the income to the decedent for his life, and the provision for termination of the trust with the consent of the trustees and adult beneficiaries entitled to the income, and delivery of the principal on such termination.
"The Bureau holds that one-half of the value of the property comprised within the trust must be included in the decedent's gross estate under the provisions of Section 302(c) and (d) of the Revenue Act of 1926, as amended."
On the same day similar letters were sent to Florence P. Blackman and Bernard M. Palmer on account of their relationship to the estate as legatee, beneficiary, trustee, and transferee, and each of these letters showed the same deficiency as that set out above.
4. April 9, 1937, Florence P. Blackman paid $94,810.59 on account of the deficiency referred to in the preceding finding and April 9, 1937, Bernard M. Palmer paid $94,810.58, which amounts included interest on the deficiency of $30,134.28, and made the total payment $189,621.17.
5. March 22, 1940, Florence P. Blackman filed a claim for refund of $189,621.17, the entire amount paid as shown in the preceding finding. On the same day a second claim for refund was filed by Bernard M. Palmer, and a third claim by Florence P. Blackman and Bernard M. Palmer, jointly, each for the same amount as that set out in the claim filed by Florence P. Blackman. Each of the claims assigned the same ground, namely, that the transaction referred to in the Commissioner's letter of December 14, 1936, on account of which the Commissioner increased the gross estate, was not a transfer in contemplation of death and that the holding of the Commissioner that one-half of the value of the property comprised within the trust must be included in the decedent's gross estate under the provisions of Section 302(c) and (d) of the Revenue Act of 1926, as amended, 26 U.S.C.A.Int.Rev. Acts, p. 227 et seq., was erroneous. The Commissioner rejected these claims July 17, 1940, and notified plaintiffs of this action by letter of the same date.
6. Since about 1891 the decedent had been connected with the Parker Pen Company and on January 14, 1924, owned or controlled one-half of its common stock, the other half being owned or controlled by George S. Parker who was president of the company. The total common capital stock of the company at that time was 10,000 shares. The decedent was secretary and treasurer, Bernard M. Palmer was credit and collection manager, and Horace L. Blackman, husband of Florence P Blackman, was sales manager of the company. The decedent, Horace L. Blackman, and Bernard M. Palmer were directors of the company and constituted one-half of its board of directors, the other half being members of the Parker family or controlled by that interest.
7. For some months immediately preceding January 14, 1924, the decedent indicated his desire to create a trust with the stock owned by him in the Parker Pen Company in order to insure the continuity in his family of his one-half interest in that company, and in order that during his lifetime he might have his children, Florence P. Blackman and Bernard M. Palmer, participate in the income from the company while they were young enough to enjoy it and while he could observe their use of such income. At that time the decedent was sixty-nine years old, actively engaged in the business, mentally alert, and at least in general appearance was in good health.
8. January 14, 1924, the decedent created a trust (hereinafter sometimes referred to as the "1924 trust") the corpus of which consisted of the 5,000 shares of common stock of the Parker Pen Company held at that time by him. At all times after its creation, the decedent, Bernard M. Palmer, and Horace L. Blackman were the trustees under the trust instrument. During the lifetime of the decedent, the income from the trust was payable as follows: One-half to the decedent; one-fourth to Florence P. Blackman, or her heirs; and one-fourth to Bernard M. Palmer, or his heirs. After the death of the decedent, one-half of the income was to be paid to Florence P. Blackman, or her heirs, and the other half to Bernard M. Palmer, or his heirs and/or wife, in the manner set out in detail in the trust instrument. The trust was to continue until the death of the survivor of the grantor's two children, their respective wife and husband, and certain named grandchildren then living, with the provision that it might be terminated otherwise in the manner thereinafter provided in the instrument. At the termination of the trust, except as provided in paragraph 16, the principal was to go one-half to the living issue of the son and one-half to the living issue of the daughter, with other provisions in the event of failure of issue. Paragraph 16 of the instrument provided as follows:
"16. The trust hereby created may, in the discretion of the Trustees, be terminated in advance of the expiration of the period for which the trust is to continue as provided in paragraph 3 hereof by either one or the other of the following events:
"First: The consent of the Trustees and all of the adult persons who at the time are beneficiaries entitled to share in the income of the trust estate;
"Second: The sale of all of the Common Stock of the Parker Pen Company owned by the Trustees and constituting part of the trust estate; provided, however, that the formation by the Trustees of a corporation for the purpose of owning, and to which they shall transfer, all of the shares of Common Stock of The Parker Pen Company belonging to the trust estate, taking to themselves and retaining ownership of, as part of the trust estate, all of the shares of stock of such corporation so formed, which they shall have full power and authority to do if they deem wise, shall not be deemed and treated as a sale of such common stock of The Parker Pen Company for the purposes of this provision relating to termination of the trust, but, in such event, the sale of such stock of The Parker Pen Company, which shall under the provisions hereof be treated as such sale, as will terminate the trust, shall be deemed to have been made only when either (a) the corporation so formed and acquiring such common stock of The Parker Pen Company shall in turn resell it other than a resale of it back to the Trustees, or (b) the Trustees shall sell the stock of the corporation which they shall have so formed and which shall have acquired ownership of such stock of The Parker Pen Company.
"In the event of such termination, the principal of the trust estate shall be distributed among and paid and transferred to the persons who at the time of such termination are enitled to share in the income of the trust estate, and it shall be distributed among and paid and transferred over to them in the same proportions in which they were, immediately prior to such termination, entitled to share in said income."
The instrument further provided that: "* * * no part of the Common Stock of The Parker Pen Company owned by the trust estate shall be sold or otherwise disposed of unless all of said Common Stock is simultaneously sold or otherwise disposed of as part of the same transaction; * * *."
9. At the time of the creation of the 1924 trust, Bernard M. Palmer was in comfortable financial circumstances and in addition was receiving a salary as credit manager and one of the directors of the Parker Pen Company. At the same time, Florence P. Blackman had a substantial individual income and her husband had a substantial amount of property in addition to receiving a salary from the Parker Pen Company as sales manager and one of the directors of that company.
10. Between the date of the creation of the 1924 trust and the creation of a second trust (which will be referred to as the "1928 trust"), there was a recapitalization and change in the capital structure of the Parker Pen Company as a result of which its outstanding capital stock was increased to 200,000 shares, one-half of which was owned by George S. Parker and one-half by the 1924 trust. There was also a small amount of preferred stock which was issued as a stock dividend. During that period the Parker Pen Company had been successful and was paying substantial dividends, and efforts had been made by various individuals and investment bankers to induce the owners of the Parker Pen stock to make it available for sale on a public stock exchange. In September 1928 Horace L. Blackman resigned his position with the Parker Pen Company and went to California where he resided thereafter. Shortly after Mr. Blackman went to California, a representative of a reliable investment banking concern in Chicago entered into negotiations for the purchase of 75,000 of the 100,000 shares of the Parker Pen Company stock which were owned by the 1924 trust. The proposed purchase price was considered attractive and the decedent, Florence P. Blackman, and Horace L. Blackman desired to carry out the sale. At that time the decedent was still acting as secretary and treasurer of the company and Bernard M. Palmer as credit and collection manager. As heretofore shown, Horace L. Blackman had resigned his office as sales manager of the company and had moved to California where he resided and was engaged in other business activities. Bernard M. Palmer did not desire to have the stock sold for the reason that he wished to continue his connection with the Parker Pen Company and remain a resident of Janesville, Wisconsin, where the company was located and where he had recently built a new home. Bernard M. Palmer feared that if the shares of stock were sold and the voting power of the Palmer family thereby reduced to less than 50 percent, he might lose his position with the Parker Pen Company. While Horace L. Blackman was anxious to make the sale, neither he nor any of the other parties sought to influence Bernard M. Palmer unduly in having him agree to the sale.
11. Bernard M. Palmer, however, finally consented to the sale of 75,000 shares of the stock held in the 1924 trust on the condition that the proceeds of the sale together with the remaining 25,000 shares of stock in the trust should continue to be held in trust under the same arrangements existing under the 1924 trust and in which the members of the Palmer family would retain the same respective interests as they then had, and all members of the Palmer family directly concerned agreed that the sale should be carried out on that basis. As heretofore shown, one provision of the 1924 trust was that no part of the Parker Pen Company stock held by the trust could be disposed of unless all of that stock was simultaneously sold or otherwise disposed of as part of the same transaction. In order that the sale might be carried out and the respective family interest remain the same as under the 1924 trust, it was necessary to terminate that trust, thereby releasing the stock from the restrictive provision as to sale, and create a new trust retaining for each member of the family the same beneficial interest as under the 1924 trust and having identical provisions except the restrictive provision relative to the sale of the Parker Pen Company stock. The 1924 trust was terminated by a document signed by the decedent, Bernard M. Palmer, and Horace L. Blackman, as trustees, and by the decedent, Bernard M. Palmer, and Florence P. Blackman, individually. This instrument was signed by Horace L. Blackman and Florence P. Blackman on November 23, 1928, in California, and by the decedent and Bernard M. Palmer on November 26, 1928, in Wisconsin. After setting out the reasons for the termination of the 1924 trust, it provided as follows:
"Now, Therefore, we, the undersigned, being all of the persons who are now beneficiaries entitled to share in the income of the trust estate above mentioned, do hereby terminate said trust and trust estate and direct the distribution of the principal of said trust estate as follows:
"To Bernard M. Palmer an undivided one-half (½) thereof:
"To Florence P. Blackman an undivided one-half (½) thereof:
and we direct the trustees to make all instruments of assignment and conveyance necessary or convenient to vest the title thereof in said Bernard M. Palmer and Florence P. Blackman each an undivided one-half (½) thereof.
"And said William F. Palmer, for and in consideration of valuable considerations to him in hand paid, the receipt of which is hereby acknowledged, does hereby waive any and all of his rights in and to said trust or trust estate and hereby consents and directs said trustees to convey the principal of said trust estate, and the whole thereof, to said Bernard M. Palmer and Florence P. Blackman each an undivided one-half (½) therein."
12. Immediately after the 1924 trust was terminated, as shown above, the 1928 trust was created. It was signed by Florence P. Blackman November 23, 1928, and by Bernard M. Palmer November 26, 1928. Under the terms of that instrument Florence P. Blackman and Bernard M. Palmer, as grantors, transferred the 100,000 shares of Parker Pen common stock and 1,500 shares of preferred stock of the same company, being all the stock held by the 1924 trust, to the decedent, Bernard M. Palmer, and Horace L. Blackman, as trustees under the 1928 trust. The terms of the 1928 trust were substantially the same as the 1924 trust except with respect to certain provisions in regard to the termination of the trust and the elimination of the restrictive provision relating to the sale of the Parker Pen Company stock, the income from the 1928 trust to be paid to the same parties as under the 1924 trust and other provisions being similar. The 1928 trust contained the following provision with respect to its termination:
"The trust hereby created may, in the discretion of the Trustees, be terminated in advance of the expiration of the period for which the trust is to continue as provided in paragraph 3 hereof by and with the consent of all of the Trustees and all of the adult persons who at the time are beneficiaries entitled to share in the income of the trust estate.
"In the event of such termination, the principal of the trust estate shall be distributed among and paid and transferred to the persons who at the time of such termination are entitled to share in the income of the trust estate, and it shall be distributed among and paid and transferred over to them in the same proportions in which they were, immediately prior to such termination, entitled to share in said income.
"Any of the provisions herein contained relating to the trust estate may be at any time altered, changed, or amended by and with the consent of all of the Trustees and all of the adult persons who at the time are beneficiaries entitled to share in the income of the trust estate."
13. After the termination of the 1924 trust and the creation of the 1928 trust, as shown in the preceding findings, 75,000 shares of common stock of the Parker Pen Company were sold by the latter trust and the proceeds reinvested as a part of its corpus. Bernard M. Palmer severed his connection with the Parker Pen Company as of January 1, 1929. In or shortly prior to January 1929, the decedent likewise severed his connection with the Parker Pen Company and in January 1929 went to California where he continued to reside until the time of his death February 1, 1933. When the 1928 trust was created, William F. Palmer was seventy-three years of age and had suffered for some years with diabetes though up to that time that illness had not interfered with his work as an active officer of the Parker Pen Company. His death was ascribed to acute uremic poisoning.
14. As heretofore shown, the Commissioner valued the corpus of the trust at the date of the decedent's death at $2,411,914.21 and included one-half of its value in the decedent's gross estate under the provisions of Section 302(c) and (d) of the Revenue Act of 1926, as amended. Claims for refund, assigning as a ground that the foregoing action was erroneous, were rejected by the Commissioner July 17, 1940.
The issue involved in these tax proceedings is whether the value of the interest of plaintiffs' decedent in a trust at the date of his death should have been included in his gross estate for estate tax purposes under the provisions of section 302(d) of the Revenue Act of 1926, 44 Stat. 9, 71, 26 U.S.C.A.Int.Rev. Acts, page 228. Two trusts are involved, one created in 1924 and another in 1928. The issue turns on whether the trust created in 1928 constituted a new trust or whether the 1928 trust is to be considered in substance as a continuation of the 1924 trust and the issue determined as if the latter trust had not been canceled in 1928.
The plaintiffs are the daughter and son, respectively, of the decedent. In 1924 the decedent owned or controlled a one-half interest in the Parker Pen Company, and the other one-half interest was owned or controlled by George S. Parker. At that time the decedent created a trust (which will be referred to as the 1924 trust) and transferred to it his stock in the Parker Pen Company. He and his son and his son-in-law were the trustees. During the lifetime of the decedent the income from the trust was to be paid one-half to the decedent and one-fourth to each of the children, and upon the death of the decedent the income was to be paid one-half to each of the children with qualifications not here material. The trust was to continue until the death of the last survivor among his children, son-in-law, daughter-in-law and then living grandchildren unless terminated prior thereto as provided in the instrument. One method of termination was by consent of the trustees and the adult beneficiaries entitled to share in the income and another was by the sale of the Parker Pen stock which comprised the entire corpus of the trust. In the event of such termination, the principal of the trust was to be distributed among the individuals who were receiving its income and in the same proportion.
Another provision of the 1924 instrument was that no part of the Parker Pen stock owned by the trust could be sold unless all of it was simultaneously disposed of.
In 1928 a banking concern offered to purchase 75,000 of the 100,000 shares of the Parker Pen stock held by the trust. The decedent, his daughter, and her husband were willing to accept the offer. The son did not look with favor on the sale, for the reason that he was afraid such a change of ownership of the Parker Pen stock might affect adversely the position he then held with the Parker Pen Company. He, however, finally consented to the sale on the condition that the proceeds of the sale and the remaining 25,000 shares of stock in the trust would continue to be held in trust under the same arrangement existing under the 1924 trust and in which the members of the Palmer family would retain the same respective interests. The decedent, his daughter, and his son-in-law agreed to that proposal. In order that the sale might be carried out and the respective family interests remain the same as under the 1924 trust, it was necessary to terminate that trust and create a new trust with the same provisions as to the respective family interests but with the restrictive provision as to the sale of the Parker Pen stock eliminated.
The 1924 trust was accordingly terminated by an instrument signed by the daughter and son-in-law on November 23, 1928, and by the son and the decedent on November 26, 1928, each party signing both individually and as trustee (when their interests so appeared). At the time of termination one-half of the income of the trust was being paid to the decedent and one-fourth to each of his children. Therefore, under the provision with respect to termination heretofore referred to, the three individuals were entitled to shares of the corpus in that same proportion. However, in lieu of receiving shares in that manner, the decedent waived his interest in the trust estate and joined the other parties in directing that the corpus of the trust be conveyed one-half to his daughter and one-half to his son.
Immediately upon the termination of the 1924 trust a new trust (referred to for convenience as the 1928 trust) was created with the same corpus, the same trustees, and with substantially the same provisions except the restrictive provision as to the sale of the stock and certain provisions in regard to the termination of the trust. Because of the direction in the termination agreement as to the distribution of the corpus of the 1924 trust and the parties to whom the corpus was conveyed, the son and daughter appeared in the new trust instrument as the creators of that trust instead of the decedent as in the case of the 1924 trust. However, the decedent, the son, and the daughter (as well as contingent beneficiaries) were entitled to receive shares of the income and, in the event of termination, to participate in the distribution of the corpus in the same manner in the case of both trusts, that is, the decedent was entitled to receive one-half of the income from the trust and upon termination one-half of the corpus, and the son and daughter were each entitled to their shares of one-fourth. The provision with respect to termination by and with consent of the trustees and adult beneficiaries remained unchanged.
Our first question is whether a new trust was created by the 1928 instrument. An affirmative answer to that question is inescapable. The 1924 trust provided for methods of termination prior to its expiration and one of those methods was availed of, namely, by agreement of the trustees and the adult beneficiaries. Upon termination, the 1928 trust was created without the provision which made the termination necessary in order to carry out a desired business transaction. That was an important substantive provision which bore a vital relationship to the corpus of the trust. After the creation of the new trust and the consummation of the sale, the trust no longer had a corpus consisting solely of stock of the Parker Pen Company which had to be disposed of as a unit but had a corpus consisting of miscellaneous assets which could be dealt with in the discretion of the trustees. Both in form and substance the 1928 trust was accordingly something different from the 1924 trust and, therefore, the property rights of the decedent in the 1928 trust which terminated with his death must be adjudged on the basis of that instrument.
Section 302(d) of the Revenue Act of 1926, supra, provides that the value of the gross estate of a decedent shall be determined by including the value at the time of his death of all property of which he has made a transfer "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, * * *." The trust instrument created in 1928, after the passage of that act, was in full force and effect at the decedent's death in 1933 and thereunder the decedent had the right together with his son and daughter and his son-in-law to revoke the trust and upon such revocation he would have been entitled to receive one-half of the corpus. At his death, the decedent's rights in one-half of the corpus of the trust ended and that part of the corpus passed to members of his family as provided in the trust instrument. The Commissioner included the value of the decedent's one-half interest in the trust in his gross estate for estate tax purposes. Such action was clearly within the statute. Helvering v. City Bank Farmers Trust Co., 296 U.S. 85, 56 S.Ct. 70, 80 L.Ed. 62.
The argument of plaintiffs that even if the 1928 trust is considered as a new trust the action of the Commissioner would nevertheless be erroneous for the reason that the decedent was not the settlor of the trust is without merit. When the 1924 trust was terminated, the decedent had the right to receive one-half of its corpus and each of his children was entitled to receive one-fourth, but instead of each of the parties receiving those respective amounts the decedent waived the receipt of his share and joined in the direction that the property be conveyed one-half to his son and one-half to his daughter. In connection with that conveyance, however, it had already been agreed that a further conveyance would also be made of that corpus, namely, a conveyance to a new trust in which the decedent would be entitled to receive one-half of the income and, in the event of its termination prior to its expiration date and during his lifetime, the decedent would be entitled to receive one-half of the corpus. While the decedent did not therefore make a transfer of the property to the 1928 trust, he caused others to make a transfer in such a manner that he retained a valuable interest therein. It is well established that the person who furnishes the consideration for the creation of a trust is the settlor even though in form the trust is created by another. Lehman v. Commissioner of Internal Revenue, 2 Cir., 109 F.2d 99, certiorari denied 310 U.S. 637; Buhl v. Kavanagh, 6 Cir., 118 F.2d 315.
It accordingly follows that both petitions should be dismissed. It is so ordered.