Opinion
Docket No. 10170.
1947-05-16
ESTATE OF WALTER A. MAY, DECEASED, MOLLIE B. MAY AND EDWIN C. MAY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Charles H. Sachs, Esq., for the petitioners. Stanley L. Drexler, Esq., for the respondent.
1. ESTATE TAX— GROSS ESTATE— TRUSTS— POWER TO REVOKE— CONTEMPLATION OF DEATH— SECTIONS 811(d)(2) and (d)(4).— The decedent retained no power to revoke the trust and did not relinquish the power of revocation in contemplation of death.
ESTATE TAX— DEDUCTIONS— CLAIMS AGAINST THE ESTATE— SECTION 812(b)(3).— A deduction for an alleged liability of the decedent disallowed because the record does not show that the decedent was liable at the time of his death for any amount.
3. ESTATE TAX— VALUATION OF INTEREST IN A TRUST.— The value of the decedent's participating interest in a trust determined. Charles H. Sachs, Esq., for the petitioners. Stanley L. Drexler, Esq., for the respondent.
The Commissioner determined a deficiency of $264,117.41 in estate tax. The parties have filed a stipulation in which they have settled some of the issues. The first issue for decision is whether the value of property which the decedent transferred in trust on June 23, 1933, should be included in the gross estate either under section 811(d)(2), (d)(4), because he relinquished the power of revocation in contemplation of death. There are certain errors assigned in the alternative which need not be mentioned at this time. Another issue for decision is whether the Commissioner erred in failing to allow a deduction for an alleged liability of the decedent under a non-profitable lease in which he had an interest, or in failing to recognize the lease as a liability in computing the value of the decedent's interest in a trust. A third issue is whether the Commissioner erred in valuing the decedent's fractional interest in properties as a proportionate part of the value of the properties as a whole.
FINDINGS OF FACT.
The decedent, Walter A. May, died on April 21, 1943, while residing in Pittsburgh, Pennsylvania. His age at that time was 69 years, 8 months, and 29 days. The proceeding was brought by the executors of his estate. The estate tax return was filed with the collector of internal revenue for the twenty-third district of Pennsylvania.
The decedent created a trust on June 23, 1933, hereinafter called the 1933 trust. He named a bank in the city of New York as trustee, and that bank continued to be trustee at all times material hereto. The principal beneficiary of the trust was the decedent's son. It was expressly provided in the trust that the grantor reserved the right to revoke it. The income of the trust was taxed to the grantor. The trust was amended and changed from time to time, but the power to revoke was retained until December 27, 1941, when an amendment was made. That amendment was intended to be and was a complete trust instrument in itself. It contained the complete and the only effective provisions of the trust after it was executed. The express provision for revoking the trust was intentionally omitted from the trust as fixed by the amendment. The trust thereafter contained no provision authorizing the decedent to revoke the trust. It did not contain any provision stating that he did not retain the power to revoke. The income thereafter was taxed to the beneficiary.
Herbert L. May, a lawyer, was the decedent's brother. The decedent sometimes looked to Herbert for legal and financial advice. Several other members of the family, including Herbert, had established trusts similar to the 1933 trust. Herbert had been largely responsible for various provisions of the trusts and for various changes in the trusts. Changes somewhat similar to that made in the 1933 trust by the amendment of December 27, 1941, were made concurrently in the other trusts. Herbert suggested and helped to make the changes in all of the trusts. He was about to leave the United States for an extended stay, and the purposes of the changes made at that time were, inter alia, to relieve the grantors of income tax and to provide the beneficiary permanently with the benefits of the bank-trustee's investment policy in the handling of the securities.
The amendment of December 27, 1941, was in no way due to any change in the health of the decedent. Contemplation of death was not the dominant motive for making that amendment. The decedent died of a cerebral hemorrhage due to arteriosclerosis on the day following a fire in his home.
The decedent filed a gift tax return for 1941, in which he reported as a taxable gift the value on December 27, 1941, of the corpus of the 1933 trust. The tax shown on the return was paid by the trustee out of trust property after it had been instructed to make that payment by the decedent and his son, who was the life beneficiary of the trust.
The Commissioner, in determining the deficiency, included in the gross estate $934.08 representing a claim for refund of 1941 gift taxes filed by the executors of the decedent. He explained in part:
* * * In view of this claim and without admitting the merits of same but solely for the purpose of protecting the Government's interest, the amount of this claim $879.70 plus $54.38 interest to 4/21/43, or a total of $934.08 is being included in the gross estate pending final determination of the said claim for refund.
The decedent's brother, Herbert L. May, entered into a lease agreement in January 1908, whereby he became the lessee for 50 years of a property on Liberty Avenue in the city of Pittsburgh. He entered into that agreement on behalf of himself, the decedent, their brother Edwin, and their father, Barney May. Those 4 parties entered into an agreement on February 1, 1908, providing that they were to share the profits and losses on the lease and all benefits and liabilities thereunder equally. The 3 others severally agreed to reimburse Herbert for any payments, losses, or liabilities in connection with the lease. Herbert transferred an undivided one-fourth interest in the lease to the other three parties on December 13, 1911. Barney subsequently died and his interest in the lease passed in equal shares to the decedent and Herbert, Edwin, and their sister Estelle. The owners of the lease transferred the entire lease to the May Properties Trust in 1926. The operation of the lease at first proved profitable and then for a while just about paid expenses, but since January 1, 1939, it has resulted in losses. The prospects at the time of the death of the decedent were that the operations under the lease would continue to result in losses to the lessee during the remaining 15 years that the lease would be effective.
The May Properties Trust was created in 1926. Properties were transferred to it. The decedent, members of his family, and others were participants. The Commissioner held that the May Properties Trust was an association, taxable as a corporation, and corporation returns were filed for the years 1939 through 1943.
The decedent was the owner at the time of his death of an interest of 18.125 per cent in the May Properties Trust. The trust corpus at that time included, in addition to the leasehold heretofore mentioned, three pieces of real estate, the total fair market value of which was then $270,000. The trust income included gross income from those properties and also gross income from the leasehold.
The Commissioner, in determining the deficiency, held that the value of the decedent's 18.125 per cent interest in the May Properties Trust was $51,160.22. The value of that interest at the date of his death was $25,000.
Herbert, in November 1944, presented a claim for $64,062.50 to the executors of the decedent's estate upon the theory that the decedent was liable for 31.25 per cent of any obligation arising under the lease and ‘the total liability and obligations of claimant under said lease for the balance of the term thereof is impossible of ascertainment with certainty and definiteness but claimant estimates the same to be $205,000, and 31.25% thereof is $64,062.50, which claimant seeks to recover from said estate.‘ All existing obligations of the lessee under the lease have been paid and the lessor had never called upon the lessee to pay any other obligations up to the date of the hearing.
A deduction of $64,062.50 was claimed on the return as the decedent's liability under the Liberty Avenue lease. The Commissioner disallowed that deduction in determining the deficiency.
OPINION.
MURDOCK, Judge:
The first contention of the respondent is that the decedent had a power to revoke the 1933 trust under the amendment of December 27, 1941. His argument is that a grantor has the power to revoke a trust instrument unless he expressly states in that instrument that he does not retain such a power. He cites no authorities to support that contention. The petitioner contends, on the other hand, that the rule in Pennsylvania, where the decedent resided at the time he executed the trust instrument, and also the rule in New York, where the trustee is situated, is that a voluntary trust in which another person has an interest is irrevocable by the grantor unless he expressly reserves in the instrument a power to revoke it, citing Gage v. Irving Bank & Trust Co., 222 App.Div. 92; 225 N.Y.S. 476; affd., 248 N.Y. 554; Hammond v. Chemung Canal Trust Co., 141 Misc.Rep. 158; 252 N.Y.S. 259; Kraft v. Neuffer, 202 Pa. 558; Reese's Estate, 317 Pa. 473. Cf. Charles E. Ives, 29 B.T.A. 822, in which it was recognized that the grantor had no power to revoke where he had created a new trust containing no reference to such a power after revoking an earlier trust in which he had retained an express power to revoke. The instruments themselves and the evidence show that the decedent intended to surrender and not to retain his power to revoke the trust. That was the reason for omitting the express authority to revoke from the amendment of December 27, 1941. Thereafter he had no power to revoke the 1933 trust. Neal v. Black, 177 Pa. 83; Rynd v. Baker, 193 Pa. 486; Fishblate v. Fishblate, 238 Pa. 450.
The respondent argues that the decedent's power to revoke the trust under the amendment of December 27, 1941, is shown by the fact that he actually revoked it in part, since he caused the trustees to pay the gift tax on an alleged transfer brought about by the amendment in question. The respondent's point is that the decedent did this wholly on his own authority, but the evidence shows that his son, who was the only beneficiary at the time, joined in instructing the trustee to make the payment. Furthermore, that payment could have been collected from the trust as well as from the decedent. The son's interest was adverse to that of the decedent. Cf. White v. Erskine, 47 Fed.(2d) 1014. Our conclusion is that the decedent had no power to revoke the 1933 trust after the amendment of December 27, 1941.
The Commissioner contends, in the alternative, that the surrender of the power to revoke by means of the amendment of December 27, 1941, was made in contemplation of death. He points to the fact that the decedent suffered during all of his life from asthma. The evidence shows, however, that the physical condition of the decedent was no different in December 1941 from what it had been previously. Other evidence tends to show that he was not contemplating death at that time, but was making extensive plans for the future. The evidence indicates further that the suggested change originated with his brother and that it was made for purposes connected with life, rather than in contemplation of death. It follows that the Commissioner erred in including the value of any part of the 1933 trust in the gross estate. It is unnecessary under this holding to consider certain alternative contentions made by the petitioners.
The petitioners have assigned as error the inclusion in the gross estate by the Commissioner of $934.08 representing a claim for refund of 1941 gift taxes. The explanation of the Commissioner in the notice of deficiency is that he has merely included the amount as a precaution pending the final determination of the claim. The petitioners state in their brief that suit on the claim was discontinued on January 29, 1947, which was after the hearing in this case. It is assumed herein that the parties are not longer in disagreement as to that item and that a proper adjustment will be made in the recomputation under Rule 50.
The petitioners claim a deduction of $64,062.50 as an indebtedness or claim against the estate due to Herbert at the date of the decedent's death. The amount represents 31.25 per cent of the losses which are expected to result during the remaining 15 years of the lease on the Liberty Avenue property. It is said that the decedent became personally liable and he made his estate liable for 25 per cent of any losses under the lease by his agreements of February 1, 1908, and December 13, 1911, and then, by an informal oral understanding, became similarly liable for one-fourth of his father's share, or 6.25 per cent. It appears, however, that the May Properties Trust became liable as lessee under the lease in 1926, and the decedent's estate can not be called upon to meet any liability under the lease as long as May Properties Trust is solvent. The petitioners suggest that the trust may become ‘depleted‘ and then the estate will have to pay 31.25 per cent of future losses. The record does not show that or when the trust is likely to become depleted. The lease had then 15 years to run. The operation under the lease had formerly been profitable, but had resulted in losses in several recent years, and there was no prospect then that it could be operated at a loss. However, the trust was the operator and was paying the losses out of income from other properties held by it. No obligation due Herbert was being built up or was in prospect as long as the trust had other income in sufficient quantities. This record does not justify a finding that the decedent was liable at the time of his death for any certain amount under his agreements or for any amount which could then have been estimated within reasonable limits. It does not show that the decedent would ever be called upon to pay anything.
The petitioners make an alternative contention, claiming that the lease was a liability of the trust and should be offset against the value of assets of the trust in determining the value of the decedent's interest in the trust. That interest was 18.125 per cent. Others in addition to the Mays held interests in the trust. The lease was a liability of the trust and adversely affected the interest of every participant. There is evidence that the losses over the remaining 15 years might be expected to amount to about $208,000. But a loss of $208,000 spread over 15 years does not represent a current liability of that much. The parties are in agreement as to the total value of the assets of the trust. The question is, What was the value at death of the decedent's 18.125 per cent participation in the trust? The petitioners argue that the 18.125 per cent interest was worth less than 18.125 per cent of the net value of the trust properties. This whole question has been resolved by the finding that the decedent's 18.125 per cent interest in the trust was worth $25,000.
Decision will be entered under Rule 50.