Opinion
Docket Nos. 111041 111042 111046.
1943-11-30
TRUST BY HUGH M. BEUGLER, DECEASED, UNDER DEED DATED APRIL 5, 1930, BETWEEN SAID HUGH M. BEUGLER, AND IRVING TRUST COMPANY, AS TRUSTEE, FOR THE BENEFIT OF LOIS DALE BEUGLER, IRVING TRUST COMPANY, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.TRUST BY HUGH M. BEUGLER, DECEASED, UNDER DEED DATED OCTOBER 22, 1927, BETWEEN SAID HUGH M. BEUGLER AND AMERICAN EXCHANGE IRVING TRUST COMPANY, AS TRUSTEE, FOR THE BENEFIT OF BERTHA L. BEUGLER, IRVING TRUST COMPANY, TRUSTEE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ESTATE OF HUGH M. BEUGLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Rudolph L. von Bernuth, Esq., and Geo. E. Hall, Esq., for the petitioners. Melvin L. Sears, Esq., for the respondent.
Decedent created prior to 1931 two trusts to which he conveyed practically all of his property, the income of which was to be paid to two of his former wives in certain fixed amounts for life and the residue of the income to himself for life, with remainders to his children and their issue. Each trust instrument provided that the trustee in its absolute discretion might transfer to the settlor at any time any part of the trust fund. Held, the corpora of the trusts are not includable in decedent's gross estate under section 811(c) or 811(d)(2), Internal Revenue Code. Rudolph L. von Bernuth, Esq., and Geo. E. Hall, Esq., for the petitioners. Melvin L. Sears, Esq., for the respondent.
These three cases, consolidated for hearing, involve a deficiency in estate tax determined by respondent in the sum of $27,743.74 against the estate of Hugh M. Beugler, deceased, the petitioner in Docket No. 111046, and a determination by the respondent that the Irving Trust Co., as trustee under two several trusts, is liable in the same amount as a transferee of property of the estate of Hugh M. Beugler, its liability as such transferee being involved in Docket Nos. 111041 and 111042. Petitioners in all three cases deny that there is any liability for the payment of estate taxes on the part of the decedent's estate, and consequently assert that there is no transferee liability. Respondent has determined that the corpora of two inter vivos trusts created by decedent should be included in the latter's gross estate, after eliminating the value of certain life estates therein.
FINDINGS OF FACT.
The parties have filed a stipulation of facts, which we incorporate herein by reference. We find the facts to be as stipulated and set out herein those facts necessary to an understanding of the issue here presented.
During his lifetime Hugh M. Beugler, then a resident of Poughkeepsie, New York, established two trusts, one by an indenture of trust dated October 22, 1927, hereinafter called the first trust, a copy of which, marked Exhibit A-1, is annexed to the stipulation of facts, which trust became effective on or about May 29, 1928, and the other by an indenture of trust dated April 5, 1930, hereinafter called the second trust, a copy of which, marked Exhibit B-2, is annexed to the stipulation of facts, which trust became effective on April 5, 1930. Irving Trust Co., petitioner in Docket Nos. 111041 and 111042, known prior to February 1, 1929, as the American Exchange Irving Trust Co., is trustee of both these trusts and in possession of the assets thereof.
Prior to and at the time of the execution of the first trust Bertha L. Beugler was the wife of Hugh M. Beugler and they were living apart under the terms of a separation agreement dated November 25, 1924.
On October 24, 1927, Hugh M. Beugler delivered the indenture covering the first trust to American Exchange Irving Trust Co., as trustee, together with a voting trust certificate for 4,000 shares of the then common stock of Central Hudson Gas & Electric Corporation (subsequently split 3 1/2 for 1) pursuant to the terms of an escrow letter dated October 22, 1927, which letter provided, among other things, that the trust indenture was to become effective on the delivery of:
(1) A certified copy of a valid decree of divorce * * * which * * * shall not contain any provision for the payment of alimony by me to said Bertha L. Beugler;
(2) An instrument terminating the existing separation agreement between said Bertha L. Beugler and me, dated the 25th day of November, 1924;
(3) An instrument executed by said Bertha L. Beugler and containing a release of dower by her in any land or real estate now or hereafter owned by me * * * .
which trust was accepted by Irving Trust Co. conditionally upon the compliance with the terms of the escrow letter.
Hugh M. Beugler and his then wife, Bertha L. Beugler, were subsequently divorced and the documents provided for in the escrow letter were submitted by Bertha L. Beugler, approved by Beugler's counsel and the trust was declared effective on May 29, 1928.
On May 29, 1928, the corpus of the first trust consisted entirely of 4,000 shares of the then common stock of Central Hudson Gas & Electric Corporation with a market value of $60 per share, a total value of $240,000.
The first trust was established by Hugh M. Beugler, after consultation with his attorneys and upon the advice of his friends and associates in Central Hudson Gas & Electric Corporation, not only to provide an income for his then wife Bertha L. Beugler for life, but also to place his property in the hands of a trustee competent to handle his personal business affairs. At the time of its establishment the principal of the trust constituted substantially all the fortune of Hugh M. Beugler.
The indenture establishing the first trust provided that the net income therefrom should be paid over as follows:
A. During the life of the Settlor, to pay to Bertha L. Beugler the sum of One hundred and fifty Dollars ($150) per month while she lives, and the entire balance of said net income in equal monthly installments, as nearly as may be, to the Settlor so long as he shall live.
B. Upon the death of the Settlor and in the event that Bertha L. Beugler shall survive him.
(1) The Trustee shall set aside so much of the principal then remaining in said trust fund as, in its absolute discretion, it shall deem to be sufficient to produce the income hereinabove provided to be paid to Bertha L. Beugler and, during her life, shall continue to pay said income to her so long as she shall live and any surplus income from the principal so set aside shall be paid in equal shares per stirpes to the Settlor's children now living and to the surviving issue if any such child or children who shall have pre-deceased the Settlor or who shall die during the life of said Bertha L. Beugler, * * * and upon the death of Bertha L. Beugler, the Trustee shall pay over and distribute the principal so set aside in equal shares per stirpes to the Settlor's children now living and to the surviving issue of any such child or children who shall have predeceased said Bertha L. Beugler * * * .
(2) The Trustee shall divide the balance of said trust property remaining after the setting aside of the portion thereof for the benefit of Bertha L. Beugler into as many equal shares as the number of the Settlor's children now living who shall survive him, or who, having predeceased him, shall leave issue surviving him; and, in the case of such of said Settlor's children as shall have predeceased him, leaving issue surviving the Settlor, the Trustee shall pay over and distribute one such share to the issue of each of such deceased children surviving the Settlor, in equal shares per stirpes; and in the case of such of the Settlor's children now living as shall survive him, the Trustee shall hold one such share IN TRUST for the benefit of each of such children and to pay over the income therefrom to such child in equal quarterly instalments, as nearly as practicable, during the period of his or her life, and upon the death of such child the Trustee shall pay over and distribute the share so held IN TRUST for such child, to the issue of such child then surviving in equal shares per stirpes, * * *
The indenture covering the first trust also provided:
SECOND: The Trustee may from time to time in its absolute discretion, and as often as it deems advisable to pay over, transfer, convey, assign and deliver the Settlor all or any part of the principal of the said trust fund, at all times retaining, however, a sufficient Principal Fund to provide the income to be paid to Bertha L. Beugler as aforesaid, and upon such payment or transfer, all obligation of the Trustee in reference to that part of the principal so paid over shall forthwith cease.
After May 29, 1928, and until the death of Hugh M. Beugler on July 16, 1939, there was paid from the income of the first trust $150 each month to Bertha L. Beugler, and the balance of the income was paid to Hugh M. Beugler in a total amount of $107,101.35.
Subsequent to May 29, 1928, Hugh M. Beugler married Lois Dale Beugler, whom he thereafter assumed to be his wife.
On April 5, 1930, Hugh M. Beugler established the second trust. On that day he delivered to the trustee of the first trust a letter requesting the trustee to deliver to him $3,750 shares of the new shares of the common capital stock without par value of Central Hudson Gas & Electric Corporation which now form a part of the corpus of the trust fund,‘ stating that it was his ‘purpose to create a new trust with these securities of which you shall also be Trustee and which will in all respects be generally similar except that Lois Dale Beugler will be the beneficiary in place of Bertha L. Beugler and will have an annual income of $2,500 under a trust created by the new indenture.‘ On the same day Hugh M. Beugler delivered the indenture covering the second trust to the trustee, together with a voting trust certificate for the 3,750 shares of the then common stock of Central Hudson Gas & Electric Corporation which he had just received from the trustee and which had a then market value of $35 per share, a total of $131,250.
The indenture covering the second trust provided that the net income therefrom should be paid over as follows:
A. During the life of the Settlor, to pay to Lois Dale Beugler the sum of Two thousand five hundred dollars $2,500) per annum, payable in equal monthly instalments as nearly as may be while she lives or until she marries some person other than the Settlor, and the entire balance of said net income in equal monthly instalments as nearly as may be to the Settlor so long as he shall live.
B. On the death of the Settlor and in the event that Lois Dale Beugler shall survive him and shall not have married some person other than the Settlor, and provided that Lois Dale Beugler shall waive and release any and all claims whatsoever to any rights or share in and to the estate of the Settlor and shall execute any and all instruments, documents and/or other papers that may be necessary or proper and that may be required by the Trustee and/or the executors and/or administrators of the Settlor's estate to effectuate said waiver and release: * * *
The succeeding provisions for the payment of income and of principal to remaindermen in subdivisions (1) and (2) are similar to those of the first trust, quoted above. It also contained a provision in paragraph second of the indenture as follows:
SECOND: The Trustee, in its absolute discretion, may from time to time, and as often as it deems advisable, pay over, transfer, convey, assign and deliver to the Settlor all or any part of the principal of the said trust fund, at all times retaining however, a sufficient principal fund to provide the income to be paid to Lois Dale Beugler as aforesaid, and upon such payment or transfer, all obligation of the Trustee in reference to that part of the principal so paid over shall forthwith cease.
On July 12, 1930, in an action brought by Hugh M. Beugler against Lois Dale Beugler their marriage was dissolved, annulled, and set aside on the grounds of fraud and misrepresentation on the part of Lois Dale Beugler.
Beginning April 5, 1930, until the death of Hugh M. Beugler on July 16, 1939, the trustee under the second trust made monthly payments to Lois Dale Beugler at the rate of $2,500 per annum, and paid to Hugh M. Beugler income from said trust in excess of $2,500 per annum for the nine fiscal years of the trust from April 5, 1931, to April 5, 1939, inclusive, a total of $2,966.82 and an average of $329.65 per annum.
Irving Trust Co. as trustee never paid any portion of the principal of the second trust to Hugh M. Beugler.
With respect to the principal of the first trust the trustee, in addition to the 3,750 shares of Central Hudson Gas & Electric Corporation new common stock which it delivered to Hugh M. Beugler to establish the second trust, from time to time delivered to Hugh M. Beugler at his request portions of the corpus of the first trust in securities or cash as follows:
+-----------------------------------------------------------------+ ¦Dec. 23, 1930, securities having a then market value of¦$8,000.00¦ +-------------------------------------------------------+---------¦ ¦Apr. 13, 1933, securities having a then market value of¦13,881.43¦ +-------------------------------------------------------+---------¦ ¦Oct. 13, 1933, securities having a then market value of¦1,035.00 ¦ +-------------------------------------------------------+---------¦ ¦Sep. 29, 1934, securities having a then market value of¦17,676.25¦ +-------------------------------------------------------+---------¦ ¦Mar. 23, 1935, cash ¦600.00 ¦ +-------------------------------------------------------+---------¦ ¦Oct. 24, 1936, cash ¦2,800.00 ¦ +-------------------------------------------------------+---------¦ ¦Apr. 2, 1937, cash ¦1,000.00 ¦ +-------------------------------------------------------+---------¦ ¦Total ¦44,992.68¦ +-----------------------------------------------------------------+
Hugh M. Beugler died at North Haven, Connecticut, on July 16, 1939. He was survived by his then wife, Martha B. Beugler, his daughter, Nan B. Vail, and three grandchildren, and also by Bertha L. Beugler and Lois Dale Beugler, who had not remarried.
The estate of Hugh M. Beugler, of which George E. Hall is administrator d.b.n.c.t.a., is now in process of settlement in the Probate Court for the District of New Haven, State of Connecticut.
The estate tax return for the estate of Hugh M. Beugler was filed with the collector of internal revenue for the district of Connecticut, on or about May 27, 1940. The return disclosed a gross estate of $8,224.80 and deductions for funeral expenses and administration expenses in the amount of $2,239.77. $5,586.75 of this gross estate consisted of sums in savings banks in the joint names of Hugh M. Beugler and his then wife Martha B. Beugler. Martha B. Beugler died on September 12, 1939. In the probate proceedings in the estate of Hugh M. Beugler and the estate of Martha B. Beugler in the Probate Court for the District of New Haven, State of Connecticut, these bank accounts totaling $5,586.75 were held to belong to the estate of Martha B. Beugler and not to the estate of Hugh M. Beugler. What was left of the estate of Hugh M. Beugler as disclosed in the return is subject to the payment of additional administration expenses over and above the amount of $2,239.77 disclosed by the return.
The respondent has included in the gross estate of Hugh M. Beugler the corpus of each of the trusts after eliminating the value of the life estate of Bertha L. Beugler in the first trust and the value of the life estate of Lois Dale Beugler in the second trust. The net value of the first trust, incorporated in the estate by respondent, was $213,958.84, and the net value of the second trust, also incorporated in the estate, was $26,216.05.
George E. Hall, as administrator d.b.n.c.t.a. of the estate of Hugh M. Beugler, has no assets in his hands with which to pay the claimed deficiency of $27,743.74.
Irving Trust Co., as trustee of the first trust, is holding for payment to the estate of Hugh M. Beugler the sum of $5,072.33, and as trustee of the second trust is holding for payment to said estate the sum of $157.32 on account of income accrued at the date of Beugler's death on July 16, 1939, and collected subsequently, subject to the approval of the New York Supreme Court, in two accounting proceedings instituted by it as trustee, subject to any claims or objections of the estate of Hugh M. Beugler or George E. Hall as administrator of said estate in respect thereto or the amount due.
The deficiency of $27,743.74 determined by respondent has not been paid and, except as to such funds held by Irving Trust Co. as trustee as enumerated immediately above as may be applicable, the estate of Hugh M. Beugler has no funds or property out of which it can pay such deficiency or any part thereof.
OPINION.
KERN, Judge:
Respondent contends that the remainder interests under the two trusts described in our findings are includable in the gross estate of the decedent settlor ‘as transfers to take effect in possession at or after death within the doctrine of Helvering v. Hallock (1940), 309 U.S. 106, and section 811(c) of the Internal Revenue Code,‘ and also under section 811(d)(2) of the Internal Revenue Code.
The latter contention may be dismissed by pointing out that the decedent settlor had no power under the trust instruments in question ‘either * * * alone or in conjunction with any person, to alter, amend, or revoke * * * . ‘ While the rights of the remaindermen were, as respondent points out, contingent on whether the corpora of the trusts were disbursed by the trustee to the settlor before the latter's death, no power to enforce this disbursement was held by the settlor, the right to make such disbursement being in the trustee ‘in its absolute discretion.‘
Respondent's argument that the transfers of the remainder interests under the trusts here in question were transfers to take effect in possession or enjoyment at or after death within the doctrine of Helvering v. Hallock, supra, is based upon the fact that under the terms of the trust instruments the trustee might distribute the bulk of the corpora of the trusts to the settlor during the latter's life, and consequently his death was the event upon the happening of which the interests of the remaindermen took effect, since so long as he lived there existed a possibility that the trustee would in effect return the trust property to the settlor.
This possibility existed, however, not by reason of any power reserved to the decedent grantor, but because of an absolute and unlimited discretionary power lodged in the trustee, the exercise of which could in no way be controlled by the grantor. Under these circumstances we are of the opinion that the rule in the Hallock case does not apply. See Herzong v. Commissioner, 116 Fed. (2d) 491; Estate of Payson Stone Douglass, 2 T.C. 487; Estate of Edward Lathrop Ballard, 47 B.T.A. 784, 791; affd., 138 Fed.(2d) 512. Before the decision of the Supreme Court in the Hallock case, the answer to this problem would have been free from doubt. Anna B. Kneeland, 34 B.T.A. 816; White v. Poor, 296 U.S. 98. After a careful study of the opinion of the Supreme Court in the Hallock case, we can find no direction to any legislative provision under which the property here in question may be subjected to an estate tax. See Paul, Federal Estate and Gift Taxation, Sec. 7.12.
It should be noted that the trusts here in question were created before the adoption by Congress of the Joint Resolution of March 3, 1931, and therefore the reservation of a life interest by the settlor in the income of the the trusts is not sufficient to bring the principal into the gross estate of the settlor upon his death. May v. Heiner, 281 U.S. 238; Hassett v. Welch, 303 U.S. 303; Estate of Edward E. Bradley, 1 T.C. 518.
Decisions will be entered for petitioners.