Docket Nos. 111082 11083.
Lloyd W. Dinkelspiel, Esq., for the petitioners. Thomas M. Mather, Esq., for the respondent.
Where an irrevocable trust instrument provides that upon the death of the life beneficiary the income shall be paid to the trustor for life and that upon the death of the survivor the ‘trust shall cease and determine, and all property then in the hands of the Trustee shall vest in and be delivered to those persons to whom said property shall be given, bequeathed or devised by the last Will and Testament of the survivor‘ and the trustor dies first, the value of the reversionary interest in the trust property is includable in his gross estate. Lloyd W. Dinkelspiel, Esq., for the petitioners. Thomas M. Mather, Esq., for the respondent.
These proceedings, consolidated for hearing, are for the redetermination of a deficiency in estate tax of $146,838.28 in Docket No. 111082, and in Docket No. 111083 of the liability of petitioner as transferee for such deficiency in estate tax. The petitioner in Docket No. 111083 acknowledges its liability as trustee for any deficiency in estate tax due from the estate of Peter D. Middlekauff. The estate of Peter D. Middlekauff will hereinafter be referred to as the petitioner.
The petitioner alleges that the respondent erred in adding to the net estate $478,866.27 representing the value (computed as part of the estate) of the corpus of a trust estate created by the decedent by indenture dated January 3, 1928; and that, if the trust estate in the amount of $478,866.27 is to be included in the gross estate, the respondent erred in failing to deduct therefrom the value of the life estate of decedent's widow, Emma P. Middlekauff, in the determination of the net estate.
The petitioner also alleges that the respondent erred in refusing to allow as a deduction in computing the net estate the sum of $6,000 paid to decedent's widow as and for her support during the period of probate of the estate.
Petitioner also alleges that the respondent erred in his computation of the alleged deficiency in not giving to the petitioner the full credit for California state inheritance taxes paid or payable by it. It was stipulated that these matters would be settled under Rule 50 computation.
FINDINGS OF FACT.
The Wells Fargo Bank & Union Trust Co., of San Francisco, California, is the executor of the estate of Peter D. Middlekauff, who died a resident of California on May 10, 1939, at the age of 80 years and 9 months, leaving him surviving Emma P. Middlekauff, his wife, who was at that time 79 years of age; Robert P. Middlekauff, son, age 50 years; and Marjorie M. Sherman, daughter, age 51 years. An estate tax return for the estate of decedent was filed by the executor with the collector of internal revenue for the first district of California.
The estate tax return discloses a gross estate of $855,622.64 and a net estate under the Revenue Act of 1926 of $701,334.79, and a net estate under the Revenue Act of 1932 of $76,334.79. The return reported various transfers made by decedent in his lifetime, including a transfer made in trust pursuant to an indenture of trust dated January 3, 1928, between decedent as trustor and the Wells Fargo Bank & Union Trust Co. as trustee. This transfer was claimed by the executor to be nontaxable. The value of the corpus of this trust at the date of death of the decedent was $478,866.27. Respondent added the value of this corpus to the net estate reported in the determination of the liability of the estate for estate tax. The return also claimed the deduction from the gross estate of $6,000 for family allowance of $750 per month. This deduction was disallowed by the respondent in the determination of the deficiency upon the ground:
* * * The value of the estate, excluding properties held in joint tenancy and transfers made during the decedent's lifetime, was less than $10,000.00. The decedent's widow had a substantial income of her own. It has not been established that the deduction claimed was actually paid or reasonably required for the support of the widow. It is held, therefore, that no deduction is allowable.
Peter D. Middlekauff was born July 17, 1858. He was an employee of the Deering Harvester Co. until about 1900, when he retired from business. Thereafter he looked after his own investments and did much traveling. He took a part time position for a few years (1908 to 1911) as president of the Acme Harvester Co. He was married in 1887 and the two above named children were born of the marriage.
In 1924 the decedent created two trusts, one for the benefit of his son and one for the benefit of his daughter. The corpus of each trust was approximately $100,000.
The decedent had observed that in many cases men who had retired from business and were more or less out of touch with business affairs did not have as good judgment upon investments after the age of 70 as persons who were younger and made investments a business. He often stated to his family that a person of the age of 70 should entrust the handling of his fortune to others.
The decedent for many years had been a sufferer from asthma. At times it was necessary for him to lie down in order to breathe comfortably. In 1923 he, with his wife, visited California and found that the San Francisco climate gave him relief from asthma. He remained in San Francisco from 1923 to 1926. In 1926 he purchased an orchard at Palo Alto, California, and built for himself a large house near his orchard.
On January 3, 1928, the decedent created a trust, naming the Wells Fargo Bank & Trust Co. as trustee. The corpus of this trust on the date of decedent's death amounted to $478,866.27 and consisted principally of municipal bonds. The trust provided in part as follows:
From and after the date hereof, all net income, revenue and profits of the trust estate shall be paid by the Trustee to EMMA P. MIDDLEKAUFF, wife of Trustor, so long as the said Emma P. Middlekauff shall live. From and after the death of said Emma P. Middlekauff, all net income, revenue and profits of the trust estate shall be paid by the Trustee to P. D. MIDDLEKAUFF, herein called Trustor, so long as he shall live.
Upon the death of the survivor of the Trustor and Emma P. Middlekauff, his wife, said trust shall cease and determine, and all property then in the hands of the Trustee shall vest in and be delivered to those persons to whom said property shall be given, bequeathed or devised by the last Will and Testament of the survivor of said P. D. Middlekauff and Emma P. Middlekauff, his wife, or if said survivor shall leave no last Will and Testament, then said property shall vest in and be delivered to MARJORIE M. SHERMAN and ROBERT PRINDLE MIDDLEKAUFF, children of the said P. D. Middlekauff, or to the issue of said children per stirpes. * * *
* * * 8
It is expressly understood that neither the said P. D. Middlekauff nor Emma P. Middlekauff shall have any right to revoke the trust hereby created as to all or any part of the property held thereunder, or to modify, alter, or amend the terms and conditions of said trust in any particular whatever.
At the same time that the trust was executed the decedent also executed his last will and testament.
On July 29, 1929, the decedent with his wife created a second trust, with the Wells Fargo Bank & Union Trust Co. as trustee. This was amended on February 26, 1931, and July 21, 1934. The value of the corpus of this trust on the date of death was in the amount of $687,039.34, and in addition income accrued in the amount of $8,195.84. The income of this trust was payable to the decedent. The executor reported it as a part of the decedent's gross estate.
Another trust was created by the decedent and his wife with the same trustee on December 30, 1933. The corpus of this trust consisted of real estate and personal property valued at the date of death of the decedent in the amount of $27,017.55 principal and $1,517.35 accrued income. This constituted a part of the decedent's gross estate.
From 1926 until the date of his death on May 10, 1939, the decedent lived upon his income and got necessary exercise and recreation by working several hours a day in his garden and orchard. He was a man with a keen mind and was much interested in worldly affairs and the study of particular subjects. He enjoyed listening to certain radio programs and for two or three years before his death was much interested in music and in reading the history of music. He suffered a fracture of his arm a little more than a year before his death and never fully recovered from that injury.
Decedent's widow filed a petition dated June 7, 1939, in the Superior Court, Santa Clara County, California, in the estate proceedings of the decedent praying that an order be made allowing her $750 per month for support and maintenance, commencing as of the date of death of her deceased husband viz., May 10, 1939. Under date of June 8, 1939, the Superior Court made its order authorizing the payments as requested. Pursuant to this order there were made during the probate of the estate of the decedent from his estate ten payments of $750 each, or a total of $7,500. The widow actually expended for her support and maintenance a sum in excess of the $750 per month allowed and paid her pursuant to the court decree.
The principal question presented by these proceedings is whether the value of the property in the hands of the trustee of the trust created by the decedent on January 3, 1928, is includable in his gross estate. The respondent has so included it in his determination of the deficiency in accordance with his interpretation of section 811 of the Internal Revenue Code, the pertinent parts of which are as follows:
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 and 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: * * *
(d) REVOCABLE TRANSFERS
(2) TRANSFERS ON OR PRIOR TO JUNE 22, 1936.— To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Except in the case of transfers made after June 22, 1936, no interest of the decedent of which he has made a transfer shall be included in the gross estate under paragraph (1) unless it is includible under this paragraph.
The respondent submits that the total value of the assets in the hands of the trustee at the date of the death of the decedent ($478,866.27) is includable in the gross estate of the decedent (1) as a transfer made in contemplation of death; (2) as a transfer to take effect in possession or enjoyment at or after death; or (3) as a transfer with respect to which the grantor reserved a power of appointment if the donee predeceased him.
In support of the proposition that the transfer made on January 3, 1928, was made in contemplation of death the respondent submits that because of the fact that the decedent was a sufferer from asthma and had low blood pressure and that at the time of executing the trust instrument he also made his will, it must be held that contemplation of death motivated the transfer, under the doctrine of United States v. Wells, 283 U.S. 102. We are convinced, however, from a consideration of the entire record that the creation of this trust was not motivated by contemplation of death. The evidence shows that the decedent for a long time had held the view that a man who was not active in business and who had reached the age of 70 was not as well qualified to manage a large estate as a trust company or one who made investments his business. This was the primary reason for the creation of the trust.
We consider next whether the transfer was one which was ‘intended to take effect in possession or enjoyment at or after * * * death‘ within section 811(c) of the Internal Revenue Code. The respondent contends that it was and in support of that contention cites Helvering v. Hallock, 309 U.S. 106. The principle which was laid down in that case is that, where a person creates a trust and provides in the trust instrument that upon the happening of some contingency prior to his death the trust property or an interest therein shall revert to him, and before the happening of any such contingency he dies, the value of the trustor's interest in the trust property in includable in his gross estate. The Hallock opinion dealt with a number of situations. One of the cases decided with the Hallock opinion was Bryant v. Helvering. The facts in that case were in substance the same as the facts which obtain in the instant proceedings. They were stated by the Supreme Court as follows:
* * * the testator provided for the payment of trust income to his wife during her life and upon her death to the settlor himself if he should survive her. The instrument, which was executed in 1917, continued: ‘Upon the death of the survivor of said Ida Bryant and the party of the first part, unless this trust shall have been modified or revoked as hereinafter provided, to convey, transfer, and pay over the principal of the trust fund to the executors or administrators of the estate of the party hereto of the first part.‘ There was a further provision giving to the decedent and his wife jointly during their lives, and to either of them after the death of the other, power to modify, alter or revoke the instrument. The wife survived the husband, who died in 1930. The Board of Tax Appeals allowed the Commissioner to include in the decedent's gross estate only the value of a ‘vested reversionary interest‘ which the Board held the grantor had reserved to himself. On appeal by the taxpayer, the Circuit Court of Appeals sustained this determination.
The Supreme Court affirmed the decision of the Circuit Court of Appeals in that case.
In the instant proceedings the decedent had provided in the trust instrument that if his wife predeceased him the income from the trust estate was to be paid to him so long as he should live and that the trust was to cease and determine upon his death, and that all property then in the hands of the trustee should vest in and be delivered to those persons to whom the property might be given by his last will and testament. By his death the retained interest in the trust property was cut off. It was not until his death that the transfer of the reversionary interest took effect.
The petitioner contends that if the principle of the Hallock case applies to these proceedings the only amount to be included in the trust estate in respect of the trust property is the value of the possibility of reverter. It is pointed out that the trustor was about two years older than his wife at the time that the trust instrument was executed and that there was less likelihood of him being the survivor than of his then wife being the survivor. It is contended that the value of the possibility of reverter is to be determined on an actuarial basis. There was introduced in evidence the testimony of a qualified actuary, who determined from actuarial tables that the value of the decedent's possibility of reverter at the date of his death was $183,712.26. The witness testified that this was the amount which an insurance company would have charged for insuring such a risk.
We are of the opinion that this contention is not in accordance with the principle of the Hallock case. If it had not been that the decedent's widow had a life estate in the trust fund we think it clear that the value of the interest to be included in the decedent's gross estate would have been $478,866.27, the stipulated value of the trust assets in the hands of the trustee at the date of decedent's death. But the widow had in any event a life interest in the trust assets. She was to receive the income of the trust for her life. The value of such life interest of the widow must be computed upon an actuarial basis and the amount thereof deducted from the $478,866.27 in the determination of the value of the reversionary interest.
Since we are of the opinion that the value of the reversionary interest is includable in the decedent's gross estate under section 811(c) of the Internal Revenue Code, it is unnecessary to consider the respondent's contention that the transfer is to be included in the gross estate under section 811(d).
The remaining question for consideration is whether the estate is entitled to the deduction of the $750 per month which was paid by the estate for the support of the widow pursuant to a decree of the Probate Court. The evidence shows that this amount received by the widow was actually expended by her for her support. The fact that the widow had income of her own and did not have to have the allowance made by the Probate Court is beside the question. See Mary M. Buck et al., Executors, 25 B.T.A. 780; affirmed on this point (C.C.A., 9th Cir.), 73 FED.(2D) 760. This issue is decided in favor of the petitioner.
Decisions will be entered under Rule 50.