Opinion
Docket No. 27511.
Promulgated December 28, 1951.
Decedent created a trust with income to herself for life. The trustees were a corporate trustee and decedent's two children. The corporate trustee had the power to invade the corpus for the comfort, education, maintenance, or support of decedent. The respondent determined the transfer in trust was subject to a gift tax. Held, no complete taxable transfer was effected by the deed of trust since the corpus might have been totally depleted by the time of decedent's death without the consent of any adverse party.
Symington P. Landreth, Jr., Esq., for the petitioners.
Maurice Bush, Esq., for the respondent.
The respondent determined a deficiency in gift tax for the year 1946 in the amount of $11,379.47. The sole issue is whether a transfer of certain property in trust in 1946 effected a taxable gift under section 1000 of the Internal Revenue Code. Respondent agrees that if we find the transfer was a taxable gift, petitioners are entitled to a specific exemption of $30,000 which will be made under a Rule 50 computation, since no adjustment for such exemption was made in computing the deficiency.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein.
Christianna K. Gramm died at the age of 86 at Rosemont, Pennsylvania, on April 27, 1949, and the petitioners are executors of her will. The gift tax return for the period here in question, 1946, was filed with the collector of internal revenue for the first district of Pennsylvania.
On May 31, 1946, decedent created a deed of trust with the Provident Trust Company of Philadelphia (hereinafter referred to as the Trust Company), Ida G. Betelle and Theodore K. Gramm (her children), as trustees thereof. The total value of the assets transferred and assigned under the trust was $83,742.24.
In 1937, decedent turned all of her securities over to the Trust Company, to be held by it as attorney in fact for her under a power of attorney. In the winter of 1945-1946, when decedent was about 83 years of age and beginning to fail in health, she decided to execute a deed of trust on solicitation of the Trust Company and advice of her counsel. The Trust Company had suggested changing the power of attorney to a deed of trust several times in the interim between 1937 and 1945. The first draft of such deed of trust was fully revocable, but this was changed to one which was revocable only with the consent of decedent's children. The Trust Company was reluctant to act as corporate trustee under such an arrangement; and the final draft, which is the trust deed before us, was the one which was signed.
The first provision of the trust designated those properties which would make up the corpus. The second provision governed the collection and distribution of income and principal of the trust. Decedent was to receive the net income for her life, and provision was made for the distribution upon her death. This section also provided that the trustees shall pay to the decedent with the written consent of her children any part or all of the corpus which she might request in writing; but if her children were incapable of giving their approval or written consent, request by decedent herself for any part of the principal would be sufficient if the corporate trustee, the sole judge, determined they were incapable of giving such written approval or consent.
The third provision was a spendthrift provision, and the fourth described the trustees' powers and gave the corporate trustee by itself the following power:
(i) To expend out of the share of principal from which any beneficiary under this Deed may be receiving income such sums as Trustees may consider to be proper for the comfort, education, maintenance or support of such beneficiary.
The fifth section provided that any taxes be paid out of the general principal of the trust, and the sixth gave the settlor the right to add to the trust. The seventh section provided that the decedent by an instrument in writing could revoke or amend the truth with the written consent of her children; but if her children were incapable of giving their written consent, the written instrument itself would be sufficient for revocation or alteration of the trust if the corporate trustee, the sole judge, determined they were incapable of giving such written consent or approval.
OPINION.
The sole issue is whether this transfer in trust by decedent in May 1946 is taxable as a gift under section 1000 of the Internal Revenue Code.
SEC. 1000. IMPOSITION OF TAX.
(a) For the calendar year 1940 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. * * *
(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States.
Regulations 108, sec. 86.3, provides, in part, as follows:
As to any property, or part thereof or interest therein, of which the donor has so parted with dominion and control as to leave him no power to change the disposition thereof, whether for his own benefit or for the benefit of another, the gift is complete. But if upon a transfer of property (whether in trust or otherwise) the donor reserves any power over the disposition thereof, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case. Accordingly, in every case of a transfer of property subject to a reserved power the terms of the power must be examined and its scope determined.
* * * * * * *
A donor shall be considered as himself having the power where it is exercisable by him in conjunction with any person not having a substantial adverse interest in the disposition of the transferred property or the income therefrom. A trustee, as such, is not a person having an adverse interest in the disposition of the trust property or its income.
Both sides agree that the trust established by decedent was testamentary in character and will be includible in her estate under section 811 (c) of the Internal Revenue Code. In line with this, petitioners argue that both a gift and estate tax cannot be owing under one transaction. Petitioners have misconstrued the law on this point. See Estate of Sanford v. Commissioner, 308 U.S. 39, 45 (1939); and Herzog v. Commissioner (C. A. 2, 1941), 116 F.2d 591.
The problem therefore resolves itself into whether the trust which decedent created gave remaindermen an interest which resulted in a taxable gift. The answer depends upon an analysis and interpretation of the trust deed itself.
In this case the settlor retained the income from the trust for her life with various provisions as to what would be done with the principal upon her death. Section FOURTH (i) of the trust deed gave the corporate trustee the power to invade the principal by itself without the consent of the other trustees for any amount which it might consider proper for the comfort, education, maintenance, or support of the income beneficiaries, and during the settlor's lifetime she was the only income beneficiary. The assistant trust officer of the Provident Trust Company of Philadelphia, who handled the whole transaction, testified that the first draft of the trust was a revocable trust; that a second draft permitted it to be revoked with the consent of the two children; and that when it was submitted to the Trust Company for examination,
* * * we stated that we would be very reluctant to act as a corporate trustee under an instrument inasmuch as it did not give us the right to take care of our customer, Mrs. Gramm. We felt that the corporate trustee, in view of the fact that their [the two children] adverse interest could block any principal payments, should have the right to use any or all of the principal for the benefit of the settlor in the event that she was in need, and for that reason the clause — I think it is Section (4) (i) — was incorporated in it, giving the corporate trustee alone the power to use the principal for the comfort, maintenance and support of the settlor.
The decedent's attorney corroborated such testimony. Neither witness was cross-examined by the respondent.
Such a provision is necessarily of importance in determining whether there was a complete taxable gift as of the date when the trust deed was signed. There was no restriction in the trust instrument limiting the extent to which the principal might be used for the "comfort, education, maintenance or support" of the settlor. Prior to the creation of the trust, the corporate trustee had acted under a power of attorney dealing with decedent's property. As decedent advanced in years, it was felt that a more concrete type of control should be effected, and the trust was created in lieu of the power of attorney. Sums which decedent might have required for her "comfort," for example, were incapable of determination or calculation at the time of the creation of the trust. The corpus was in medium amount (about $83,000) so that it was possible the corporate trustee would have to invade the corpus for her benefit. Numerous situations can be imagined where such would be done for decedent's "comfort," such as the purchase of a house in which she might live, the necessity of moving to a different climate because of her health, or illness entailing large expenses for doctors, nurses, hospitals.
The power granted to the corporate trustee to invade the principal for the benefit of the income beneficiary was not a completely unfettered power. Certain standards exist under state law; and, where there is abuse of discretion, such abuse can be corrected by a court for the benefit of the beneficiary. See In re Martin's Estate (Super.Ct. Pa., 1939), 4 A.2d 551, citing Restatement of Trusts § 187. Edward Rayne McComb Herzog, 41 B. T. A. 509 (1940), affd. (C. A. 2, 1941) 116 F.2d 591, is distinguishable from this case since there we found that the right to the income of the trust was subject to gift tax because the grantor did not reserve the income to himself, and whether he received it or not was in the uncontrolled discretion of the trustee.
Under such circumstances, it is difficult to see how it can be stated that a complete taxable transfer for gift tax purposes was effected by the deed of trust of May 1946. In Sanford v. Commissioner, supra, the Supreme Court held that a gift became complete when the power to modify was renounced even though the grantor himself had no right to either the income or the corpus of the trust gift. One of the reasons given by the Court for such holding was that the donees become liable for the gift tax on the gift if it is not paid by the donor; and such liability should not arise in a situation where the next day the donor, by exercise of some power reserved to himself, might divest the donees of their right to ever receive the gift. See also Commissioner v. Allen (C. A. 3, 1939), 108 F.2d 961, certiorari denied 309 U.S. 680 (1940).
Perhaps the cases closest to the instant case are those dealing with inclusion in the gross estate of a decedent of the corpus of a trust established by decedent, where the decedent or the trustee had the right to invade the corpus for the benefit of the decedent. In such cases, inclusion in the gross estate of the corpus was required on the grounds that the alleged gift was not complete until the death of the settlor. See Blunt v. Kelly (C. A. 3, 1942), 131 F.2d 632; Estate of Lelia E. Coulter, 7 T.C. 1280 (1946); Estate of John J. Toeller, 6 T.C. 832 (1946), affd. (C. A. 7, 1948) 165 F.2d 665. See also Merchants Bank v. Commissioner, 320 U.S. 256 (1943); Estate of Charles H. Wiggin, 3 T.C. 464 (1944). Technical changes have been made in the Code with respect to estate taxation subsequent to the above-cited cases, but they are immaterial here.
In Daisy B. Plummer, 2 T.C. 263 (1943), the settlor established a trust with income to her for life and remainders over. She also retained the right to withdraw at her request $15,000 per year from the corpus for each year of her life. This Court held that a gift tax was due on the remainder computed by use of actuarial tables assuming withdrawal of the full $15,000 per year. In the case at bar, there was no limitation as to the amount which could be withdrawn by the corporate trustee for the comfort, etc., of the decedent. Such a situation is similar to that in the Plummer case where the taxation of the remainder assumed a withdrawal of the full $15,000 per year. Since here we have an unlimited possibility of withdrawal, it is difficult to see how a completed gift resulted from the execution of the deed of trust in May 1946.
We, therefore, hold that respondent erred in determining that a gift tax was owing upon such transfer in trust.
Reviewed by the Court.
Decision will be entered under Rule 50.