Docket No. 109271.
Prew Savoy, Esq., for the petitioner. James C. Maddox, Esq., for the respondent.
Decedent, for the purpose of securing an independent income to his son, unconditionally assigned to him an interest in an indebtedness owned to decedent. The debtor executed a new note to the son payable not later than 18 months after decedent's death. The son agreed that upon payment of the principal of the note, he would set up a trust with the proceeds thereof, from which the income would be paid to him for life, then to his daughter for life, with remainder over to her issue or if she should die without issue, then to his brother or his brother's issue. Held, the gift to the son was not intended to take effect in possession or enjoyment at or after decedent's death within the meaning of section 302(c) of the Revenue Act of 1926, as amended. Prew Savoy, Esq., for the petitioner. James C. Maddox, Esq., for the respondent.
Respondent determined a deficiency in estate tax in the amount of $121,460.95. The only question remaining in this proceeding is whether respondent erred in including in the gross estate the value of a gift which decedent made during his life to a son, William A. Taylor, Jr. Respondent determined that the value of the gift, should be included in decedent's estate under the provisions of section 302(c) of the Revenue Act of 1926, as amended. Other issues raised by the pleadings have been settled under stipulation and effect will be given thereto under Rule 50. Petitioner claims a refund of estate tax paid.
The estate tax return was filed with the collector for the third district of New York on September 29, 1938, and tax was paid on that date in the amount of $299,619.63.
The facts have been stipulated; the stipulation of facts is incorporated herein by reference; and the facts are summarized as follows:
FINDINGS OF FACT.
William A. Taylor died on June 29, 1937. He was a resident of New York City, third collection district. The will of decedent was admitted to probate by the Surrogate's Court, New York County, on July 9, 1937, and on that date letters testamentary were issued to the executors named in the will, William A. Taylor, Jr., Henry C. Taylor, and Thomas D. Hewitt. William A. Taylor, Jr., died on January 10, 1938, and Thomas D. Hewitt died on February 19, 1941, leaving the petitioner the sole surviving executor of the will of the decedent, in which capacity he is now qualified to act and is acting.
During 1928 the decedent and his son Harry C. Taylor, and Jeremiah Beall, were engaged in carrying on a dry goods commission business as a partnership under the firm name of Taylor, Clapp & Beall. In December of 1928 the decedent, wishing to retire from the business, executed an agreement with Henry C. Taylor, whereby the decedent loaned $770,000 to Henry C. Taylor and received his promissory note in the face amount of $770,000, with interest at 6 percent. The note was dated January 2, 1929, and was payable on or before January 2, 1932. The agreement was made specifically binding on the executors, administrators, and assigns of both parties.
From time to time payments were made on the note. On December 21, 1931, Henry executed a new note in the amount of $675,000, for the unpaid balance of the original note, and the old note was returned to him. The new note was due January 1, 1932. The date of payment was subsequently extended to January 1, 1934.
Prior to May 1932 the decedent consulted Thomas D. Hewitt, his attorney, in regard to providing an independent income for his other son, William A. Taylor, Jr., and his family, without having to pay tax on such income. Pursuant to advice of counsel, the decedent executed an assignment dated May 16, 1932, which read in part as follows:
I, William A. Taylor, the undersigned, * * * in consideration of One Dollar to me paid and of the agreement hereinabove mentioned on the part of my son, William A. Taylor, Jr., do hereby sell, assign, transfer, and set over unto my said son William A. Taylor, Jr., an interest to the extent of $165,000 in the indebtedness of $675,000 owing me by my son Henry C. Taylor, TO HAVE AND TO HOLD said sum of $165,000 subject to and in accordance with the agreement of even date herewith made and delivered to me by said William A. Taylor, Jr., * * *
This assignment is made for the benefit of my said son William and of my other descendents as is provided in said agreement made by my said son William.
In consideration of his father's assignment of the note, William executed an instrument dated May 16, 1932, the pertinent provisions of which are as follows:
1. Immediately upon the payment to me of said principal sum of $165,000, or of any sum or sums that may from time to time be paid to me on account thereof, I will pay the amount or amounts which I thus receive to the trustees hereinafter named and will execute and deliver a deed of trust assigning, transferring and conveying the same to myself and New York Trust Company, its successor or successors, and the survivor after my death, in trust as follows:
(A) During my life to hold, invest, reinvest and manage the same and collect the income therefrom and to apply the net income to my use during my life;
(B) Upon and after my death to continue to hold, invest, reinvest and manage so much of the principal of said trust, whether a part or the whole, as I may last will and testament designate, and to collect the income therefrom and apply the net income to the use of my wife (provided she be a person in being when such deed of trust be made) during her life or for such shorter period as I may direct, and upon the termination of any trust for her benefit to pay and deliver the principal of such trust to and among any issue then living in equal shares per stripes, and in default of such issue to pay brother Henry, or if he be not then living, to Henry's issue then living in equal shares per stirpes;
(C) Upon my death to divide so much of the principal of said trust, to the income whereof I shall be entitled, as I may not by my will direct to be held in trust for my wife, into equal shares equal in number to my children who shall survive me and my child or children who may die before me leaving issue me surviving and to pay and deliver one such equal share to the issue collectively of each child of mine who shall die before me leaving issue me surviving, and to pay and deliver one such equal share to each child of mine who survives me but who shall not be in being when said deed of trust shall be made, and to continue to hold in trust one such equal share for each child of mine who survives me and who shall be in being when said deed of trust shall be made and to hold the same upon the trusts hereinabove described and to apply the net income from each such share to the use of my child for whom the same shall be held in trust during his or her life, and upon the death of any child for whom a share shall be held in trust to pay and deliver the principal of his or her trust to his or her issue then living in equal shares per stirpes, or, in default of such issue, to and among my lineal descendants then living in equal shares per stirpes, or, in default of such lineal descendants, to my brother, Henry C. Taylor, or, if he be not then living, to his lineal descendants then living; in equal shares per stirpes.
2. As to any part of said indebtedness from my said brother Henry ,c. Taylor to me not paid to me in my lifetime, but paid to my executors or administrators after my death, I covenant and agree that they will distribute and pay the same among and to the persons (including the surviving trustee) who would be entitled, and in the shares in which they would be entitled, then to receive the same in accordance with the provisions contained in paragraph hereof numbered ‘1‘ if the same had been paid to me in my lifetime and that they will execute and deliver any deed of trust to me in my lifetime necessary to carry out this agreement into effect.
4. This agreement is made for the benefit of the persons hereinabove designated as distributees or as beneficiaries of the trust or trusts hereinabove set forth and shall be enforceable by any of them as well as by the executors or administrators of my said father's estate.
At the date of the execution and delivery of the above mentioned assignment and agreement, William A. Taylor, Jr., had a daughter, Jessie Taylor, who is now living. At that time, Henry had four children: Henry William Taylor, Walter Jennings Taylor, Peter Burr Taylor, and Jean Taylor, all of whom are now living.
On May 16, 1932, William executed another instrument whereby he acknowledged as follows:
* * * that my share of my father's estate, whether the same shall be devised and bequeathed to me outright or in trust for my benefit, is to be charged with the sum of One hundred and sixty five thousand dollars ($165,000), being the amount of the advance against my share of my father's estate which was made to me by the assignment by my father under date of the 16th day of May, 1932, of an interest to the extent of the sum of $165,000 in the debt owing by my brother Henry C. Taylor to my said father.
The above instrument was held by the decedent at the time of his death.
On or about May 16, 1932, the note of Henry to the decedent for $675,000 which was due January 1, 1934, was returned to Henry, and he executed two notes in the aggregate amount of $675,000, dated May 16, 1932, as follows: One note was made payable to decedent in the amount of $510,000, which was due January 1, 1934, with 6 percent interest. Another note in the amount of $165,000 was made payable to William, or his executors, to be paid 18 months after the death of William A. Taylor, the decedent, or prior to such time, if Henry so desired. The terms of this note are as follows:
New York City, N.Y. May 16th, 1932.
Eighteen months after the death of my father, William A. Taylor, I promise to pay to my brother William A. Taylor, Jr., his executor or executors, administrator or administrators, the sum of One hundred and sixty-five thousand dollars ($165,000) subject to and pursuant to the terms of an assignment by William A. Taylor to William A. Taylor, Jr., dated the 16th day of May, 1932, and subject to an agreement by William A. Taylor, Jr., dated the 16th day of May, 1932, respecting the creation of a trust upon the payment of this present note.
I further promise to pay to said William A. Taylor, Jr., interest at the rate of six percent. (6%) per annum upon the amount of this note, or any unpaid balance, on the last day of each month in each year until the full principal shall be fully paid.
I reserve the right to pay off the whole or any part of the principal of this note at any time upon thirty (30) days prior to written notice to said William A. Taylor, Jr.
HENRY C. TAYLOR.
Deliveries of the assignment of the decedent and of Henry's above note were made to William after he delivered to the decedent the agreement of May 16, 1932.
From May 26, 1932, until decedent's death, Henry paid decedent $135,000 on the note for $510,000, so that the unpaid balance at decedent's death was $375,000. Also, interest on this note was paid.
It is stipulated that ‘from the date of delivery thereof in 1932, to April 1, 1938, the full amount of the interest on the note of $165,000 was paid by Henry C. Taylor to William A. Taylor, Jr.‘ (William died on January 10, 1938.) On April 1, 1938, the full amount of the principal sum of the note, $165,000, was paid to City Bank Farmers Trust Co. for the account of the estate of William A. Taylor, Jr., and after Henry qualified as the executor of that estate, the said sum came into the possession of and was held by Henry as executor of William's estate.
On April 17, 1943, Henry C. Taylor, as executor of the will of William A. Taylor, Jr., petitioned the Surrogate's Court of the County and State of New York for authority to carry out the agreement dated May 16, 1932, and to set up the trust as provided therein, and he presented to the court a proposed trust agreement between himself, as executor of William's estate, and the New York Trust Co.
William A. Taylor, Jr., was divorced September 19, 1935, and did not remarry prior to his death. William A. Taylor, Jr., did not exercise the power of appointment held by him under the terms of the agreement dated May 16, 1932.
The parties are agreed that the transfer of the interest of $165,000 in the note of Henry by decedent for the benefit of William and his family was not made in contemplation of death.
Claim for the refund of $21,927.39 of estate tax by the estate of William A. Taylor, deceased, was filed with the collector for the third district of New York on September 27, 1941, and has not been allowed.
The parties to this proceeding have stipulated that the gross estate shown in the notice of deficiency, dated August 29, 1941, is to be reduced by the following additional deductions:
a. Additional administration expenses in the sum of $159.94, plus such further sum as the Surrogate's Court may allow upon the executors' accounting for fees of any special appointed and such commissions on principal to executors as said Court may allow, the said sums to be determined in the settlement under rule 50 of this Court.
b. Additional attorneys' fees in connection with the petition to this Court and any further appeal from its decision, in such reasonable amount as may be agreed upon by the parties in connection with such settlement under rule 50.
c. Additional income tax accrued at the date of death in the sum of $6,556.11.
d. The stipulation of any additional deduction is not to be taken as a claim for a refund or a petition timely filed.
The sole question for determination is whether the gift by the decedent to his son William is includible in the decedent's gross estate under section 302(c) of the Revenue Act of 1926, as amended by section 803(a) of the Revenue Act of 1932. This turns primarily upon whether the gift was intended to take effect in possession or enjoyment at or after decedent's death.
SEC. 302. The 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—(c) To the extent of any interest therein on which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.
The facts have been stipulated and are relatively simple. In 1932 Henry C. Taylor owed the defendant the sum of $675,000, represented by a note. In May 1932 the decedent assigned $165,000 of this indebtedness to his son William. Thereupon, Henry C. Taylor executed two notes, one in the sum of $165,000 payable to William and one for the balance, payable to the decedent. The note payable to William could be paid at any time thereafter, but was required to be paid not later than 18 months after the death of the decedent. At the same time, William agreed, in writing, that upon payment of the principal of the note he would establish a trust in the amount of $165,000, from which the income would be paid to William during his life (with the power to designate a portion of the income to his wife, which power however was not exercised by William) and thereafter to his daughter Jessie, his sole issue, for her life; the principal to be paid to the issue of Jessie upon her death, or, if she should leave no issue, to Henry C. Taylor, if he survived Jessie, otherwise to Henry C. Taylor's lineal descendants. This agreement was enforceable by the decedent and the beneficiaries. William also executed an acknowledgement that the amount of the gift would be treated as an advance and would be chargeable against his share of decedent's residuary estate. For some time prior to 1932 the decedent had been contributing approximately $10,000 annually for the support of William and his family. The purpose of the transaction under which William received the note in the sum of $165,000 was to relieve decedent from income tax on his annual contributions to William and his family.
Respondent has agreed that the gift to William was not made in contemplation of death. He contends, however, that the gift was a transfer intended to take effect in possession or enjoyment at or after decedent's death. Although he does not deny that the assignment of the note was made in decedent's lifetime, he claims that the circumstances of the assignment indicate that it was in the nature of a testamentary disposition. His argument is based, primarily, upon the fact that the principal of the note was not required to be paid until 18 months after decedent's death and upon the further fact that William's share in decedent's residuary estate was to be charged with the face amount of the gift. Respondent does not cite any case where the facts resemble the facts here. He relies upon Helvering V. Hallock, 309 U.S. 106, apparently because of the dicta expressed in that case to the effect that section 302(c) ‘taxes under vivos transfers that are too much akin to testamentary dispositions not to be subjected to the same excise.‘
The facts, however, in Helvering v. Hallock, supra, are entirely dissimilar to the facts in this case. There the decedent set up a trust for the benefit of his wife, but if she predeceased him, the corpus of the trust was to be returned to the settlor. The basis of this decision that the corpus of the trust was includible in the decedent's gross estate was that he had retained a possibility of reverter. The Court held that the transfer took effect in possession or enjoyment at or after his death because his death was the indispensable and intended event which brought about a shift in the economic interest of the property transferred. That trust was therefore in the nature of a testamentary disposition because the grantor until his death retained a right in the trust property. Although gift to the trust was made inter vivos, it was the grantor's death with effectuated the disposition of the property to the remaindermen. That this is the meaning of the Court's language in Helvering v. Hallock, supra, upon which respondent relies, is illustrated by the subsequent case of Whitney v. State Tax Commission of New York, 309 U.S. 530. In that case, after referring to Tyler v. United States, 281 U.S. 497; United States v. Jacobs, 306 U.S. 363; and Porter v. Commissioner, 288 U.S. 436, it was said that:
* * * The attempt to differentiate the tie that binds these cases by treating the inter vivos transfers in these decisions as mere substitutions for testamentary dispositions, disregards the emphasis in these cases on the practical effect of death in bringing about a shift in economic interest, and the power of the legislature to fasten on that shift as the occasion for a tax. * * *
Here, the gift by decedent to William was complete in the decedent's lifetime. The donor had parted with every vestige of control over the beneficial enjoyment and possession of the note. If by a presently operative conveyance inter vivos a person transfers immediately to another all of his property interests in a res, there is no deferment of ‘possession or enjoyment‘ or any other incident of ownership, and the statutory language of section 302(c) does not apply. Shukert v. Allen, 273 U.S. 545. If an inter vivos transfer comes within the statutory language, it must be one by which some of the incidents of ownership are postponed until at or after the death of the transferor. In Shukert v. Allen, supra, a father created a trust in favor of his three children in 1921, with directions to accumulate the income until 1951. The settlor died in the same year. The Supreme Court held that this was not a transfer intended to take effect in possession or enjoyment at or after his death, because, although the fund would not be distributed until after the death of the settlor, the distribution was in no way contingent upon his death, and he had parted with all interest in the property during his lifetime. An inter vivos transfer, to come within section 302(c), must, in some way, be effectuated by the death of the donor.
In this proceeding, although the face amount of the note might not be paid until after the decedent's death, his death did not add anything to William's property rights in the note, since the decedent had unconditionally parted with all of his interest in the note during his lifetime. His death merely fixed a definite time for the payment of the note, which could be paid prior to his death. It did not affect the ownership of all rights in the note and its proceeds which had vested in William prior to his father's death. A similar situation existed in Reinecke v. Northern Trust Co., 278 U.S. 339. There, a decedent had created a number of trusts during his lifetime. In five of them he gave life interests to certain beneficiaries, with remainders to others. The life interests were terminable upon the death of the settlor or within a prescribed period after his death. The Court held that these trusts did not take effect in possession or enjoyment at or after the settlor's death. Although the enjoyment of the remainders hinged upon the death of the settlor, he had not retained any interest in the property transferred in trust. In the course of its opinion, the Court said:
* * * The two sections read together indicate no purpose to tax completed gifts made by the donor in his lifetime not in contemplation of death, where he has retained no such control, possession or enjoyment. In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402(c) ‘to take effect in possession or enjoyment at or after his death,‘ include any others than those passing from the possession, enjoyment or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer. * * *
In the recent case of Estate of Flora W. Lasker, 47 B.T.A. 172, this Court said:
The Northern Trust Co. case is solid authority for a negative answer to respondent's contention that section 302(c), as amended, should be applied without regard to whether ownership or control is retained in the settlor-decendent. See Commissioner v. Kellogg, 119 Fed.(2d) 54. The Northern Trust Co. case makes it clear that, in order that a gift may be included in the donor's estate as intended to take effect in possession or enjoyment at or after death, it is necessary that something pass from decedent at death. * * *
In this case decedent gave to William all of his interest in the debt of Henry to the extent of $165,000. The gift was outright and unconditional. On his part and as consideration for the assignment, William agreed to create a trust under which he would be the life beneficiary of the income. However, the decedent did not attach any ‘strings‘ to the gift. If William did not create the trust under his agreement, the corpus would not revert to decedent. His only right under the agreement, to which his executors succeeded, was to commence an action to compel William or his executors to specifically perform the agreement. Under such circumstances, it can not be said that decedent retained any dominion or control of the res in his lifetime. His death, therefore, was not the ‘generating source‘ of any accession to the property rights of William. Knowlton v. Moore, 178 U.S. 41; Tyler v. United States, supra.
Accordingly, it is held that the gift by decedent to William was not intended to take effect in possession or enjoyment at or after decedent's death, and is not includible in decedent's gross estate under section 302(c) of the Revenue Act of 1926, as amended.
Decision will be entered under Rule 50.