Docket No. 5457.
John J. Sloan, Esq., for the petitioner. L. R. Bloomenthal, Esq., for the respondent.
1. In 1923 decedent established revocable trusts for the benefit of his children. In 1924 he amended them by making them irrevocable and reserving for himself only the power to designate beneficiaries. In 1934, in order to eliminate the trustee, to continue the trusts, and to rehabilitate the trust corpora, decedent designated his son, John R. MacManus, as the beneficiary of all outstanding trusts. His son thereupon executed a declaration of trust in favor of the surviving children, including himself. Decedent died in 1940. Held, that decedent remolded the trusts, continuing as the grantor thereof, and that the trust corpora were includible in his estate under the provisions of section 811(c) of the Internal Revenue Code.
2. John R. MacManus, as trustee under the declaration of trust, purchased certain annuity contracts with trust funds. Decedent was the annuitant. At decedent's death, the total unpaid original cost thereof was $237,804.06 and their commuted value was , $191,113.34. The contracts required that the expended costs be repaid in annual installments without interest. Held, that the latter figure is the correct measure of value of such contracts for estate tax purposes. John J. Sloan, Esq., for the petitioner. L. R. Bloomenthal, Esq., for the respondent.
The respondent determined a deficiency of $75,358.07 in the estate tax of the estate of Theodore F. MacManus, deceased.
The primary issue is whether or not the value of the corpus of the trusts created by Theodore F. MacManus for the benefit of his children is includible in his estate under the provisions of section 811(c) or section 811(d) of the Internal Revenue Code.
A secondary issue is the proper value of annuity contracts determined by the respondent to be a part of the decedent's estate. This issue becomes moot if the petitioner prevails on the primary issue. Other issues were conceded and abandoned.
FINDINGS OF FACT.
Certain facts were stipulated. As so stipulated, those material to the issues are as follows:
The petitioners are duly qualified executors of the estate of Theodore F. MacManus, deceased. The estate tax return for that estate was filed with the collector of internal revenue for the district of Michigan.
On July 18, 1923, Theodore F. MacManus created six revocable trusts, one each for his children, John R. MacManus, Theodora MacManus, Alice Mary MacManus, Hugo MacManus, Hubert MacManus and Edwin Benedict MacManus. All trusts were identical in form, except that a different child was named as beneficiary. The Detroit Trust Co. was the trustee in all trusts. The trusts contained the following pertinent provisions:
1. The trustee shall safely keep the trust property, shall collect the income thereon, and after paying all costs, charges and expenses and disbursements properly chargeable to income, including trustee's compensation, shall expend such part of the net income as in the opinion and judgment of said trustee and in its sole discretion may seem best for the maintenance, education and support of Theodora MacManus, daughter of the first party. The trustee's discretion in the matter shall control. Accumulations of income may be invested by the trustee but first party shall be consulted as to the amount and nature of said investments. Any property of the trust may be sold or exchanged when consented to by the party of the first part. Stock dividends, if any, shall be treated as capital. Investment of income and reinvestment of principal shall not be confined to such securities as are legal for trust funds, but may include anything, except real estate, which the trustees may consider proper.
3. The party of the first part reserves to himself the power (a) to revoke this grant and assignment, in whole or in part, and to receive back all or any part of the above described property, free from any claim, right or title of the second party or the beneficiary; (b) to transfer such property to such other or different uses and trusts as he may appoint and to such person or persons as he may designate; (c) to transfer to second party other property to be held subject to the same uses and purposes, and subject to the same powers of revocation and appointment. The exercise of any of the powers so reserved shall be by instrument in writing, signed by first party and deposited with second party. And such powers shall apply, not only to property transferred or its avails, but also to accumulations of income.
4. Unless this grant and assignment is sooner revoked, the trust hereby created shall terminate on the death of the party of the first part; Provided, however, that the said Theodora MacManus shall then have reached the age of thirty years; if not, the trust shall continue and shall terminate upon her reaching the age of thirty years. On termination, the entire principal, together with the accumulations, shall pass to and be paid over to the said Theodora MacManus, to be her sole property and estate.
5. Should said Theodora MacManus predecease the party of the first part, the interest, right and title of said Theodora MacManus, as beneficiary, both as to income and as to principal, shall pass to and become vested in her distributees, that is to say, the persons who by statute of distributions shall be entitled to share her interstate (sic) personal estate and in the proportions in such statute provided, and such trust shall terminate on death of first party, and thereafter die before reaching the age of thirty years, the trust shall terminate and the entire estate be paid over to her distributees. The powers in paragraph three (3) reserved to the party of the first part shall continue in any event throughout his lifetime.
6. The provisions hereof for the maintenance, education and support of the beneficiary, or any beneficiary hereafter appointed, shall be and remain in effect whether such beneficiary be a minor or not, and whether there is any other fund applicable to the same purpose or any person bound by law to provide for such beneficiary's maintenance, education or support or not.
Such sums as the trustee may in its discretion pay from income, from time to time, for the maintenance, education and support of beneficiary, it may pay over periodically to a parent, guardian or other person or institution furnishing such maintenance, education or support, and the receipt of such parent, guardian, person, or institution shall be complete discharge of the trustee's liability to account for income so expended.
On December 30, 1924, Theodore F. MacManus executed an amendment to each of the six trusts conceling, releasing, and surrendering to the trustee all right and power to revoke the grants and assignments made by the trust instruments dated July 18, 1923; the grantor also surrendered and revoked the original and reserved general and unlimited power to transfer the trust property to any other person or persons as beneficiary, but reserved to himself:
The power, from time to time and as often as he may think proper, to designate as beneficiaries, along with or in place of, the said (beneficiaries), any person bearing any of the following relationships to the named (beneficiary) that is to say, spouse, child, brother, sister, or spouse or child of a brother or sister.
Hugo MacManus and Hubert MacManus, two of the six beneficiaries in the trusts, died on September 6, 1930, and December 9, 1932, respectively, and all of the assets of the two trusts created for their benefit were distributed under the terms of the trusts to their distributees or heirs at law. Thereafter there were only four trusts in existence, one trust for each of the following children of the grantor, namely, Theodora MacManus, John R. MacManus, Alice MacManus, and Edwin Benedict MacManus. Alice MacManus and Theodora MacManus, two of the beneficiaries above named, married. Their names now are Alice MacManus Fox and Theodora MacManus Toluboff, respectively.
In the early 1930's the grantor became dissatisfied with the Detroit Trust Co., the original trustee. On April 20, 1934, after numerous conferences between the grantor, his son John R. MacManus, other members of the MacManus family, Godfrey Hammel, and his attorney, John J. Sloan, the following note was written by the grantor to his son, John R. MacManus:
As you are aware, we have had several discussions during the past year with the Trust Co. concerning the arrangement with them. They have probably done their best— as they see it— but Messrs. Hammel and Sloan and myself are agreed that your interests and those of your brother and sisters will be best served, if we take the whole matter in hand ourselves. If the Trust Co. is eliminated there is a good chance that the four trusts can be rehabilitated which is, of course, my dearest wish. I am advised that the simplest way of relieving the Trust Co. of the four trusts is to change the beneficiary provision from Theodora, Alice, and Teddy to you. You would then act as sole trustee and all clerical and other signature provisions would be executed through you. If these are the mechanics to be followed it is agreeable to me. I want to impress upon you most earnestly, however, that the original spirit behind the creation of the trust is not changed. Our distinct and definite understanding is that the four trusts are to remain intact and that your own, Theodora's, Alice's, and Teddy's positions will be exactly the same. The details and mechanics of the matter I leave to you in consultation with Mr. Hammel and Mr. Sloan.
On May 9, 1934, John R. MacManus executed the following declaration of trust:
KNOW ALL MEN BY THESE PRESENTS, that I, JOHN R. MACMANUS, of Bloomfield, Hills, Oakland County, Michigan, do hereby make the following declaration of Trust, that is to say:
Theodore F. MacManus, the Grantor in four (4) Trust Agreements dated July 18, 1923, and later amended, in which trust Theodora MacManus, Alice M. MacManus, Edwin Benedict MacManus, and John R. MacManus are the respective beneficiaries, has indicated that under the powers reserved to him in said trusts and amendments, he is to make me, the said John R. MacManus the sole beneficiary in each of said four (4) trusts.
The purpose of so changing the beneficiaries in said Trusts is to facilitate a termination thereof by unanimous consent of all the parties in interest so that said Trusts may be continued in a broader form to the end that if possible said Trusts may be rehabilitated, I, the said John R. MacManus, supplanting the Detroit Trust Company as trustee.
I therefore acknowledge, pursuant to a common understanding with all parties in interest, that I shall hold all of the corpus and income of said trusts as Trustee for Theodora MacManus, Alice M. MacManus (now Alice M. Fox), Edwin Benedict MacManus and John R. MacManus, share and share alike.
It is understood that the assets of said trust may be by me at any time converted into cash or exchanged for other securities and that funds so realized may be carried by me in my own name individually or as trustee, and that I may make investments from time to time in business ventures or speculative ventures, but whether carried in my name individually or as trustee, it is understood that all of said assets and all the emoluments and dividends and profits thereof are and shall be the property of the four (4) persons hereinbefore named in the proportions hereinbefore indicated.
It is understood that I may upon request of Alice Holdridge MacManus, the mother of all of the beneficiaries hereinbefore named pay to her from time to time any part of the corpus and income of said trust estate or estates, and that all such payments shall be deemed to be the equal contribution of all the beneficiaries herein named, and that the receipt to me of the said Alice Holdridge MacManus shall be my full acquaintance to the extent thereof.
It is further understood that I may from time to time with the consent of Alice Holdridge MacManus advance to said beneficiaries a part of the corpus or income of said trusts, the making of the said advancement being however within my sole discretion, and the amounts so advanced shall be a charge against such beneficiaries' interest.
I further agree that if, as and when any dividends or profits are declared on any investments of such trust funds and paid to me, I may divide the same equally among the persons hereinbefore named, if at that time I deem such division advisable or I may withhold the same and credit to account of beneficiaries if I deem it expedient for the benefit of such trusts.
It is further agreed that I shall be responsible only for the exercise of good faith and to account to the four (4) beneficiaries named above.
It is further understood that this trust shall remain in full force and effect until the death of the survivor of Theodore F. MacManus and Alice Holdridge MacManus, his wife. On termination, the entire assets of said trust estate shall pass to and be paid over to the beneficiaries thereof, share and share alike, and in the event of the death of any such beneficiary prior to termination of trust such share shall be held in trust till termination, then pass to his or her distributees; that is to say, the persons who, by the statute of distributions, shall be entitled to share his or her intestate personal estate and in the proportions in such statute provided.
It is further understood that in the event of my death my successor as trustee shall be nominated by Theodore F. MacManus and Alice Holdridge MacManus, his wife, or the survivor of them, and such nominee shall immediately succeed to all my rights, privileges and duties as trustee hereunder.
Pursuant to the expressed understanding, on May 10, 1934, Theodore F. MacManus executed an amendment to the three trusts for Theodora, Alice, and Edwin Benedict, changing the beneficiary therein to John R. MacManus. Concurrently, Theodore, Alice, his wife, and John R. MacManus released the Detroit Trust Co. as trustee of the several trusts. The release recited that John R. MacManus as beneficiary, Theodore F. MacManus as maker, and Alice H., his wife, ‘being all of the parties having a present interest in said agreements and supplements, ‘ acknowledged the receipt of all assets of the trust estates and agreed that all rights and powers of the Detroit Trust Co. should be transferred to John R. MacManus.
On December 29, 1937, Theodora MacManus Toluboff assigned all her right, title, and interest in the trust estate created for her benefit to her sister, Alice MacManus Fox, and her two brothers, Edwin Benedict MacManus and John R. MacManus. On or before March 15, 1938, assignment and paid a gift tax thereon in the amount of $1,970.59. No claim for refund of said gift tax was ever filed and no refund has ever been allowed.
The trusts created by the declaration of John R. MacManus dated May 9, 1934, were passed upon by the United States Circuit Court of Appeals for the Sixth Circuit in an income tax case entitled MacManus v. Commissioner (C.C.A., 6th Cir., 1942), 131 Fed.(2d) 670,reversing44 B.T.A. 508.
Between June 1, 1935, and October 1, 1938, John R. MacManus, as trustee, purchased with trust funds certain annuity contracts based on the life of Theodore F. MacManus, for the account and benefit of the trusts. The contracts provided that all payments thereunder be made to the trustee during the lifetime of Theodore F. MacManus, the latter being referred to in the policies as the annuitant. The contracts had an original cost of $330,000. On September 12, 1940, the total unpaid original cost thereof (the amount of the cost of the contract still not repaid in annual installments at the time of the decedent's death) was $237,804.06 and their commuted value at that date was $191,113.34. The unexpended (unexhausted) costs were to be repaid in annual installments without interest.
In connection with the purchase of these contracts by John R. MacManus, the decedent wrote the New York Life Insurance Co. as follows:
Mr. John MacManus is in full control of the Trust Estate in which he is trustee and which is evidenced by a declaration of trust dated May 9, 1934.
I have no interest in said trust, but for the purpose of complying with your request, the application of the said John R. MacManus for said annuity has my full approval and any future applications he may make of like nature have also my full approval.
and to the Equitable Life Assurance Co. of the United States, as follows:
In response to your letter of June 25, 1936, to Robert M. Ryan, Agency Manager at Detroit, I hereby state that if I be deemed to have any interest in the trust of May 9, 1934, the purchase of a contract of annuity on my life meets with my approval, and likewise any subsequent contracts of like nature.
I expressly affirm, however, that I have no interest whatsoever in said trust of May 9, 1934.
The total taxable net income, from 1934 to 1940, inclusive, of the trusts created by John R. MacManus on May 9, 1934, is as follows:
+----------------------------------------+ ¦1934 (loss)¦($1,575.36)¦1939 ¦$14,587.23¦ +-----------+-----------+-----+----------¦ ¦1935 ¦21,114.31 ¦1940 ¦5,936.04 ¦ +-----------+-----------+-----+----------¦ ¦1936 ¦46,253.88 ¦ ¦ ¦ +-----------+-----------+-----+----------¦ ¦1937 ¦25,360.95 ¦Total¦113,514.47¦ +-----------+-----------+-----+----------¦ ¦1938 ¦1,837.42 ¦ ¦ ¦ +----------------------------------------+
On the books of John R. MacManus, trustee, there is an account entitled ‘Advances— Alice H. MacManus.‘ The debits, credits, and balances for the years 1935 to September 12, 1940 inclusive, are as follows:
+-----------------------------------------------+ ¦Year ¦Debit ¦Credit ¦Balance ¦ +------------------+-------+---------+----------¦ ¦1935 ¦$17,130¦ ¦$17,130.00¦ +------------------+-------+---------+----------¦ ¦1936 ¦10,550 ¦$271.06 ¦27,409.04 ¦ +------------------+-------+---------+----------¦ ¦1937 ¦5,000 ¦25,000.00¦7,409.04 ¦ +------------------+-------+---------+----------¦ ¦1938 ¦35,300 ¦ ¦42,709.04 ¦ +------------------+-------+---------+----------¦ ¦1939 ¦38,500 ¦500.00 ¦80,709.04 ¦ +------------------+-------+---------+----------¦ ¦1940 (to Sept. 12)¦25,650 ¦250.00 ¦106,109.04¦ +-----------------------------------------------+
The sum of $106,109.04 was included by the Commissioner as one of the assets of the trusts of which John R. MacManus is trustee.
On July 18, 1928, Theodore F. MacManus executed his last will and testament which, having been unrevoked prior to his death, was admitted to probate in the Probate Court for Oakland County, Michigan, on October 13, 1940. The testator established a residual trust with the Detroit Trust Co., Alice H. MacManus, and John R. MacManus, as trustees, for the following stated purposes:
My said trustees shall safely keep said trust property and shall collect all income therefrom and after paying all proper costs, charges and expenses in connection with the administration of said trust, shall pay over at such time and in such manner as shall be agreeable to her, all of the net income of said trust estate to my wife, Alice Holdridge MacManus, so long as she shall live.
I further direct, should the net income from said trust estate, together with the income of my said wife from her own separate estate, be inadequate to properly support my said wife according to her station in life, that she be given in addition to the income from said trust estate sufficient of the principal or corpus of the trust estate to properly maintain and support her.
Upon the death of my said wife, or upon my death, should she pre-decease me, said trust estate shall be divided into equal separate shares or trust estates, one for each of my children me surviving, and one for the issue of each deceased child of mine, and the income therefrom shall be paid, share and share alike to my said children then living and to the issue of any deceased child by right of representation, subject to the following limitations:
(a) Should said deceased child be a son of mine and die before attaining the age of thirty five years, married and leaving a widow and issue, his share of said income shall be paid as follows: One third thereof to his widow and the remaining two-thirds to his issue, until such time as said deceased son would have attained the age of thirty-five years had he lived; provided however that in no event shall the payment of said income or the continuation of this trust extend beyond a period of twenty-one years from and after the death of said son, and provided further, that in the event of the death of the widow of said deceased son before her deceased husband would have attained the age of thirty-five years had he lived, the whole of said income of said deceased son's trust estate shall be paid to his issue for the period above provided, and provided further, that in the event of the death of said widow and issue before said deceased son would have attained the age of thirty-five years had he lived, the entire income of said son's trust estate shall be paid to my surviving children and to the issue of any deceased child of mine by right of representation, share and share alike, until said son would have attained the age of thirty-five years had he lived, but in no event shall such payments of income or said trust estate continue beyond a period of twenty-one years from and after the death of said son.
(b) If, however, said deceased child is a daughter of mine and dies before attaining the age of thirty-five years, married and leaving a husband and issue, her share of said income shall be paid only to her issue, and only until such time as said daughter would have attained the age of thirty-five years had she lived and in no event shall said payments of income extend beyond a period of twenty-one years after the death of said daughter, provided that should all the issue of said daughter die before their mother would have attained the age of thirty-five years had she lived, their income shall be paid to my surviving children and the issue of any deceased child, by right of representation, share and share alike, until said daughter would have attained the age of thirty-five years had she lived, but in no event shall payment of said income or the continuation of said trust estate extend beyond a period of twenty-one years from the death of said daughter.
(c) In the event any of my sons should die before attaining the age of thirty-five years, married, but without issue, his share of said income shall be paid, one third to his widow and the remaining two thirds to his surviving brothers and sisters and the issue of deceased brothers and sisters by right of representation share and share alike, until such time as said deceased son would have attained the age of thirty-five years had he lived, provided, that in no event shall such payment of income extend beyond a period of twenty-one years from and after the death of said son.
(d) In the event any of my daughters should die before attaining the age of thirty-five years, married but without issue, her share of said income shall be paid to her surviving brothers and sisters by right of representation, share and share alike, until such time as said daughter would have attained the age of thirty-five years had she lived and in no event shall such payment of income extend beyond a period of twenty-one years from and after the death of said daughter.
(e) In the event any of my children should die before attaining the age of thirty-five years, leaving neither spouse nor children his or her income shall be paid to my surviving children and to the issue of any deceased child by right of representation share and share alike, for the period herein provided for the payment of income in each case.
(Certain contingencies arising from the death of the testator's children were provided for, but they are not pertinent to the issue.)
Theodore F. MacManus died on September 12, 1940, and was survived by the following:
+-----------------------------------------------------------------------------+ ¦Name ¦Relationship¦Age¦Matrimonial ¦Number of ¦ ¦ ¦ ¦ ¦status ¦grandchildren ¦ +----------------------+------------+---+----------------+--------------------¦ ¦Alice H. MacManus ¦widow ¦70 ¦ ¦ ¦ +----------------------+------------+---+----------------+--------------------¦ ¦Theodora MacManus ¦daughter ¦40 ¦married ¦1 ¦ ¦Toluboff ¦ ¦ ¦ ¦ ¦ +----------------------+------------+---+----------------+--------------------¦ ¦John R. MacManus ¦son ¦37 ¦married ¦2 ¦ +----------------------+------------+---+----------------+--------------------¦ ¦Alice MacManus Fox ¦daughter ¦36 ¦married ¦4 ¦ +----------------------+------------+---+----------------+--------------------¦ ¦Edwin Benedict ¦son ¦24 ¦married ¦2 ¦ ¦MacManus ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
According to the books of Theodore F. MacManus and the books of his wife, Alice H. MacManus, Theodore F. MacManus owed his wife as of September 12, 1940, the sum of $34,199.20 for advances of moneys by her to him or for moneys spent by her for his account or benefit from January 1938 to September 12, 1940.
Forty-two shares of common stock of the Detroit Trust Co., a Michigan corporation, of a fair market value of $1,890, were included by the executors in schedule B of the estate tax return of Theodore F. MacManus, deceased.
Under date of June 1, 1945, attorney fees in the amount of $1,000 were paid to John J. Sloan, attorney for the estate of Theodore F. MacManus, deceased, to apply on account of his services in the matter of that estate.
The death certificate relating to the death of Theodore F. MacManus assigned toxic hepatitis as the primary cause thereof, duration 5 to 7 days, and nephrosis with anuria as a secondary cause, duration 2 days, and it stated that his age at death was 67 years, 10 months, and 12 days.
The record discloses the following additional facts:
Prior to May 1934 the decedent desired to terminate the trusts of July 18, 1923, because (1) he was satisfied to have his children possess the property ‘without further strings attached to it‘; (2) he was dissatisfied with the actions of the Detroit Trust Co. as trustee; and (3) he wanted to rehabilitate the trust corpora through investments in common stocks, a procedure to which the trust company had objected.
The declaration of trust of May 9, 1934, executed by John R. MacManus was prepared under the instructions of the decedent and was submitted to the decedent for his approval before execution by his son. The change of beneficiary accomplished by the amendments of May 10, 1934, was for the purpose of facilitating the termination of the original trusts. Theodora was in the Philippines, Alice resided in Indianapolis, and Edwin Benedict was a minor at the time. That form of procedure was adopted to avoid the necessity of securing releases and consents to transfer the corpus to John R. MacManus.
From April 1934 to a few days before his death, the decedent was in good health. He had his own physical culture director. He took regular gymnastic exercises on the days when he was at his office and had mechanical equipment for exercising at home. On May 10, 1934, his health was excellent.
The decedent conducted an advertising agency. Until 1936 he was associated with the advertising agency corporation of MacManus, John & Adams. That company was organized to handle several large advertising accounts, including those of the General Motors Corporation and the Champion Spark Plug Co. He engaged in other work until 1938, when he undertook to organize a fund-raising drive for the Catholic University at Washington, D.C. In 1940 he assumed an advertising campaign for the Willys-Overland. Shortly before his death, the decedent made several presentations of proposed sales programs to the sales and dealer departments of the company.
John R. MacManus was an employee and officer of MacManus, John & Adams. In 1934, upon advice of his father, his mother, and Godfrey Hammel, his business adviser, he invested $75,000 of trust funds in the stock of MacManus, John & Adams. After the decedent left that company, John R. MacManus sold the stock to John and Adams for approximately $200,000. The sale was made at the instance of the purchasers, who refused to continue to work with the company unless they had stock control thereof.
The decedent received a salary of $20,000 a year and a percentage of the residual profits from the operation of MacManus, John & Adams. He had previously received salaries or compensation of from $50,000 to $350,000 a year. Alice H. MacManus had her own separate estate prior to 1924 and held it continuously thereafter. It was more than sufficient to repay loans due to the trust which formed a part of the decedent's estate.
The Commissioner added to the value of the decedent's net estate the sum of $456,582.59 as ‘transfers during decedent's life,‘ with the following explanation:
The value of the corpus of the trust created by the son in May 1934 for the benefit of decedent's children is held includible in decedent's gross estate under the provisions of section 811(c) and/or section 811(d) of the Internal Revenue Code.
He also excluded as deductions attorney's fees amounting to $1,000 and debts of the decedent amounting to $30,000, the former on the ground that they were estimated and unpaid and the latter for lack of evidence. The respondent's notice of deficiency contains this ‘explanation of adjustments‘: ‘See Exhibit A for list of trust assets and value thereof.‘ Exhibit A shows as an asset ‘balance receivable from annuity (sic) contracts . . . 237,804.06.‘
VAN FOSSAN, Judge:
The petitioners' contention on the major issue is essentially that the declaration of trust made by John R. MacManus on May 9, 1934, constituted a new and separate document wholly independent of the original trusts executed by the decedent in 1923 and of the amendments thereto made in 1924. In support thereof, the executors argue that the provisions of the declaration of trust differ materially from those in the original trusts, as amended, and in some respects are in direct conflict with them. They then conclude that the intent of the decedent, acquiesced in by the trustee and the beneficiaries, was obviously to wipe out the original trusts, together with the powers reserved to the decedent which might carry through and thus control subsequent trusts, and to establish an entirely new agreement eliminating all interest, rights, and powers of the decedent in the trust corpus held by John R. MacManus.
Under facts practically identical with those now before us, this precise question was considered by the Circuit Court of Appeals for the Sixth Circuit in MacManus v. Commissioner, 131 Fed.(2d) 670, reversing the decision of the Board of Tax Appeals at 44 B.T.A. 508. The issue in that case, involving income taxes, was whether the petitioner, John R. MacManus, was a trustee in four separate trusts or in a single trust with multiple beneficiaries. There the Court, for whose opinions we have great respect, held that there were four independent trusts; that the declaration of trust made by John R. MacManus was consonant with the intent of the decedent to reshape or remold the original trusts; and that the decedent was still the grantor of the trust estate, regardless of the form that the reshaping or remolding took.
The court there said:
* * * Early in 1934 the grantor, being dissatisfied with the handling of the estates by the trustee, desired to terminate or reconstitute the trusts and to rehabilitate the assets. The carrying out of his purpose was preceded by family conferences and resulted in the transfer of the assets of all four trusts to the petitioner who executed a declaration of trust wherein he acknowledged holding the corpus as trustee for his two sisters, his brother, and himself, share and share alike. It is with the interpretation of his instrument that the controversy mainly is concerned. Prior to its execution, however, Theodore F. MacManus on April 20, 1934, wrote to the petitioner advising him of his intention and purpose is reconstituting the trusts. Since the Board found the petitioner's declaration ambiguous and resort to extrinsic aids to its interpretation necessary, the precise terms of this communication likewise become important * * * . (The communication is the letter from the decedent to his son appearing in our findings of fact.)
The court stated that Theodore F. MacManus was dead and that ‘it is his intention that is conceded to be controlling.‘ The court then said:
Assuming ambiguity, we turn to a consideration of the grantor's letter to his son John. It indicates his sole purpose to be a change of trustee because of his dissatisfaction with the results obtained by the Trust Company. He is advised that the simplest way of relieving the Trust Company is to change the beneficiary provision from Theodora, Alice and Teddy, to John, who would then act as sole trustee. Then to avoid any misunderstanding or confusion, he says, ‘I want to impress upon you most earnestly, however, that the original spirit behind the creation of the trust(s) is not changed. Our distinct and definite understanding is that the four trusts are to remain intact and that your own, Theodora's, Alice's and Teddy's positions will be exactly the same. ‘ Had he stopped there, no contention could reasonably have been made that it was his purpose to convert the separate trusts into one. The final sentence of the letter, however, says, ‘The details and mechanics of the matter I leave to you in consultation with Mr. Hammel and Mr. Sloan‘. It is upon this grant of authority that the Board relies in concluding that the ‘administration‘ (book treatment) of the estate was in consonance with the grantor's intention.
The court proceeded to discuss the effect of the use of the singular and plural reference to the trusts as affecting the problem immediately under its consideration and added:
It thus will be seen that in the declaration of the trustee there is a clear recognition of the purpose of Theodore F. MacManus to continue the existing trusts with but one change, and that in the name of the trustee, and that the predominant thought throughout the instrument is that there are four trusts and not one. * * *
Thus the controversy basic to the issue here has been decided by the Circuit Court of Appeals. The decedent remained the grantor of the trusts set up by his son on May 9, 1934, and the rights, powers, and interest reserved to him in the original trusts were retained by him until his death.
The petitioners point out many provisions contained in the declaration of trust inconsistent with those appearing in the trusts of 1923 and the amendments of 1924. No extended discussion of such differences is required. The latter conditions may be considered as modifications or amendments of the original documents. The petitioners further argue that the use of the word ‘terminate‘ in the declaration of trust and in the record, together with the decedent's disavowal of any ‘interest‘ therein, served to eliminate entirely the original trusts and paved the way for the creation of four new and complete trusts.
We do not so construe the record, nor did the Circuit Court of Appeals. The words ‘continue‘ and ‘rehabilitate‘ were also used in the declaration of trust and the word ‘reconstitute‘ in the opinion of the court. It is clear to us, as it was to the Circuit Court of Appeals, that it was not the decedent's intention to obliterate the original trusts, but to carry them on through the new instrument executed by his son, with the Detroit Trust Co. ejected as trustee. The decedent's alleged disclaimer of any ‘interest‘ in the May 9, 1934, trust, as shown in his letters to the insurance companies, may well apply to pecuniary interest and not to the rights and powers reserved to him. To a layman, the entire gamut of his potential legal rights under the trust agreements would not be constantly before him. His disclaimer must be viewed in the light of all the facts.
Therefore, the retention of the right and power of the decedent to designate the beneficiaries of the trust brings the case at bar precisely within the language of section 811(c) of the Internal Revenue Code and renders the trust corpus subject to the estate tax.
SEC. 811. GROSS ESTATE.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, except real property situated outside of the United States—(c) TRANSFERS IN CONTEMPLATION OF, OR TAKING EFFECT AT DEATH.— To the extent of any interest therein of 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. * * *
The respondent argues also that the decedent relinquished the enjoyment of the trust corpus in contemplation of death. In view of our decision just made, we need not discuss this phase of the issue.
It now becomes necessary to consider the proper value of the annuity contracts at the date of the decedent's death. The respondent contends that the basis of value is governed by Regulations 105, section 81.10(i)(2), which provides that ‘the value of an annuity contract issued by a company regularly engaged in the selling of contracts of that character is established through the sale by that company of comparable contracts,‘ and that the unpaid original cost is the proper value. The petitioners maintain that the commuted or discounted value of the contract is the proper basis.
Upon the death of Theodore F. MacManus there became due and payable so much of the annuity contracts as remained unpaid, or $237,804.06, as stipulated. The respondent claims that this amount is the correct value of the contracts which fell into the decedent's estate. However, the contracts provided that the amount so unpaid should be repaid in annual installments of a stated amount, without interest. The proceeds of the contracts, therefore, to be paid by the company constituted its obligation to pay the stipulated sum, not in a lump sum, but in installments extending over a period of years. This is not the type of ‘annuity‘ contract contemplated by Regulations 105, section 81.10(i)(2). No evidence was offered to show that any of the companies named in the record was regularly engaged in the sale of annuity contracts or would have sold a ‘contract‘ comparable to their obligations at the date of the decedent's death. Hence, there is named no price at which such contracts would have been sold. The respondent has not followed his own regulation in supporting his determination of value.
The value of an annuity contract issued by a company regularly engaged in the selling of contracts of that character is established through the sale by that company of comparable contracts.
The petitioners have demonstrated clearly that the simple obligation of the company to pay to the decedent's estate the remaining unrepaid amount of the contract ($237,804.06) in installments over a period of years without interest is not equivalent to an obligation to pay the full amount of such unrepaid portion of the contract upon the decedent's death.
Therefore, it is obvious that the value of such an obligation at the decedent's death was not the full amount of the unpaid original cost, but was that cost, reduced appropriately to account for the use of the money by the company without interest until all contractual installments should have been paid. We can not assume that the company would have sold, or the estate would have purchased, such a contract at the figure indicated by the respondent.
If it be argued that the principle set forth in United States v. Ryerson, 312 U.S. 260; Guggenheim v. Rasquin, 312 U.S. 254; and Powers v. Commissioner, 312 U.S. 259, is applicable here, it need only be pointed out that those cases involved the correct value of single premium life insurance policies assigned as gifts. The Court held that the cash surrender value was not the proper criterion for valuation, since cash surrender value represents only one of the several rights held by the owner of the policy, but that cost is a cogent evidence of value and was the only suggested criterion reflecting the value to the owner of his entire bundle of rights in a single premium insurance policy.
The case at bar presents no question of life insurance, but only a simple evaluation of the right of the estate to receive, at the date of the decedent's death, the annual installments during the term of years established in the contract. The company had the option to pay the full amount of annual installments upon the decedent's death, but at a discounted or commuted value of such deferred payments. Since the commuted or discounted value of the obligation of the company to pay in installments the amount due at the annuitant's death has been stipulated to be $191,113.34, we believe that sum to be the proper measure of the value of the contracts, and we so hold.
Reviewed by the Court.
Decision will be entered under Rule 50.