Opinion · United States Tax Court
Estate of Garrett v. Commissioner
8 T.C. 492
- Type
- Opinion
- Court
- United States Tax Court
- Jurisdiction
- Federal
- Date
- 1947-02-28
- Topic
- estate-planning
OPINION. Oppek, Judge: The issue here raises the usual problem in contemplation of death cases; that of determining by a deductive process from all the facts the nature of decedent’s dominant motive for making the transfers. The issue does not arise here with equal force as to all of the interests transferred. Decedent made three separate transfers. Respondent now appears to concede that the property embraced in the so-called Trust No. 2 may be eliminated from the estate.
Citator
UpLaw has not yet analyzed Estate of Garrett v. Commissioner. The absence of a flag is not a finding that it is good law.
- Authority status
- pending
- Cited by
- 17 opinions
ESTATE OF GARRETT v. COMMISSIONER OF INTERNAL REVENUE,8 T.C. 492(1947)
ESTATE OF PAUL GARRETT, DECEASED, EVELYN E. GARRETT, HOWARD C. PAULSEN,
AND J. CAMPBELL MOORE, EXECUTORS, PETITIONER, v. COMMISSIONER OF INTERNAL
REVENUE, RESPONDENT.
Docket No. 4407.
United States Tax Court.
Promulgated February 28, 1947.
2. Additional transfers of decedent's property in trust, over which decedent had effective control until his death by means of intervening subservient corporation; trustees, beneficiaries, and provisions being the same as decedent's will,heldto be part of comprehensive plan for testamentary disposition, and to be in contemplation of death.
The issues are whether respondent erred in including the value of the assets of the several trusts in the gross estate under section 811 of the Internal Revenue Code.
Respondent has conceded that a trust referred to as Trust Fund No. 2 created in an instrument of November 30, 1923, is not includible in the gross estate.
The case was presented by a stipulation of facts and evidence adduced at the hearing. Those facts hereinafter appearing which are not from the stipulation are otherwise found from the record.
FINDINGS OF FACT.
The stipulated facts are hereby found accordingly.
Decedent, Paul Garrett, died March 18, 1940, at the age of 76 years, in a New York hospital. The immediate cause of his death was pneumonia following an abdominal operation. He had been working at the office before going to the hospital. His appetite did not indicate that he had stomach trouble.
Decedent had been a man of good health and great energy, frequently working with but a few hours sleep. He was about six feet in height and in later years weighed about 240 pounds. Aside from his last illness and minor illnesses such as colds, his close lifelong friends and business associates could recall no illness except an attack of coronary thrombosis in 1930 or 1931, subsequent to the death of his son, Charles. He made a good recovery from this attack.Page 493
Decedent was continuously active in the wine business as president of Garrett Co. from prior to 1890 until his last illness. He signed his 1939 income tax returns in his home on March 12, 1940.
Decedent in the year indicated passed the physical examinations for the following life insurance policies:
Number of Year Amounts policies
1890 ...................... $20,000 3 1901 ...................... 50,000 5 1903 ...................... 10,000 2 1910 ...................... 57,500 7 1912 ...................... 25,000 1 1913 ...................... 7,500 3 1916 ...................... 20,000 2 1917 ...................... 10,000 1 1921 ...................... 10,000 2 1922 ...................... 10,000 2 1923 ...................... 30,000 2
The four policies of 1922 and 1923 were with three different life insurance companies, the latest date being October 10, 1923.
1890 ...................... $20,000 3 1901 ...................... 50,000 5 1903 ...................... 10,000 2 1910 ...................... 57,500 7 1912 ...................... 25,000 1 1913 ...................... 7,500 3 1916 ...................... 20,000 2 1917 ...................... 10,000 1 1921 ...................... 10,000 2 1922 ...................... 10,000 2 1923 ...................... 30,000 2
The wine business was begun by decedent in a small way at Weldon, North Carolina, and within a few years it doubled in size. In 1903 the business was moved to Norfolk, Virginia, and in 1917 to New York. It had increased its capacity and finances four or five times while in Virginia. From 1917 until national prohibition in 1920 Garrett Co. had fifteen plants throughout the United States. With the advent of prohibition their plants were reduced to four, which continued operation as producers of medicinal and sacramental wines. At the time prohibition went into effect Garrett Co. had a large inventory of wines on hand which took four or five years to liquidate, and yielded considerable money. Decedent, as principal stockholder, became entitled to about $2,500,000 thereby.
On November 30, 1923, decedent executed a trust agreement reciting the transfer of certain properties as "Trust Fund No. 1" and "Trust Fund No. 2," respectively, to a corporate trustee and Carl R. Ganter and W. Frank Hope, "Individual Trustees."
The transfers into Trust Fund No. 1 comprised $750,000 face value of bonds and 30 policies of life insurance. The life insurance consisted of fully paid policies amounting to $30,000 and continuing ordinary life policies amounting to $220,000 face value. The cash surrender value of the policies on November 30, 1923, aggregated approximately $90,000. The trust property was assigned and transferred to the trustees. After the transfers decedent had an estate in excess of $1,000,000.
The instrument provided that the assets of Trust Fund No. 1 should be divided by the trustees into four equal shares, "one share for each child of the grantor who is now living, viz: His son Charles W. Garrett; his daughter, Evelyn C. Garrett; his daughter, Dorothy V. Garrett; and his daughter Mary E. Garrett," but:Page 494
To pay to, or apply to the use of, the wife of the grantor, Evelyn E. Garrett, the net income of each of the whole number of said shares during her life, and, upon her death to pay to, or apply to the use of, each of said children then living the net income of his or her share during his or her life, and upon his or her death, to pay and transfer the principal of the same and any undistributed income thereof to his or her lawful issue, per stirpes and not per capita; or in the event that any of such children predecease said Evelyn E. Garrett, to convey, transfer and pay over to the lawful issue of each such child then deceased, per stirpes and not per capita, the principal of his or her share and any undistributed income thereof then held by the Trustee. * * *
It was further provided that upon the son attaining the age of 25 years, on June 10, 1928, there should be paid to him $25,000 of the principal of his share, with additional payments of $25,000 on attaining the age of 30 years, and $50,000 on attaining the age of 35 years. Provision was also made for cash payments out of the principal of the respective shares for the children — $10,000 on marriage, $10,000 on the third marriage anniversary, and $5,000 on the fifth marriage anniversary. On the death of any child without issue his share was to be transferred equally to the remaining shares.
The transfers into Trust Fund No. 2 comprised bonds of $250,000 face value, with division into four equal shares, one for each child. The trustees were to pay the income "of his or her share" of this fund "during his or her life" to the respective child, and make distribution of the principal to issue of each child upon the death of each child. There were like provisions to those respecting Trust No. 1 relating to a child dying without issue.
Paragraph "Fourth" of the instrument stated:
The Trustees shall have full power and authority, from time to time, to sell and convey any part of the trust funds at public or private sale at such times and upon such terms as in their unrestricted discretion they may deem proper, and to realize the cash surrender value of any of the insurance policies included in said trust funds, and to invest, and to sell and reinvest, from time to time, in like discretion, any part of the trust funds or the proceeds thereof for any purpose hereunder, and the Trustee shall be free to retain or sell, invest or reinvest, according to their discretion and without restriction or limitation by or under any law or ruling of any state or country and specifically of the State of New York.
And paragraph "Twelfth" provided:
The Trustees shall hold the insurance policies hereinbefore described as constituting part of Trust Fund No. 1 and any additional policies assigned, transferred, and set over to them hereunder to be added to said Trust Fund, without any obligation of any nature in respect thereto other than the safekeeping thereof by the Corporate Trustee and the payment, so far as may be necessary to keep said policies in full force, of the premiums thereon by the Corporate Trustee, as the same become due, out of the net income received by the Trustees upon said Trust Fund No. 1, during the life of the Grantor (which payment shall be regarded as an application of the income so used to the use of the respectivePage 495beneficiaries of said Trust Fund), and upon receiving proof of his death, or that any of said policies shall have matured, to use their best efforts to collect and receive any and all sums of money payable thereunder, and when so collected and received to add the same to the principal of said Trust Fund No. 1, subject to the provisions hereof. If, during the existence of these trusts, it shall be decided by a court of competent jurisdiction that the provisions herein made with respect to the payment of said life insurance premiums out of the net income of Trust Fund No. 1, are for any reason invalid, or a rule of law to that effect be authoritatively enunciated, then and in that event, but not otherwise, the Grantor authorizes, empowers and directs the Trustees to sell from time to time, at public or private sale and upon such terms as in their unrestricted discretion they may deem proper, so much of the securities composing the principal of Trust Fund No. 1, and/or to realize the cash surrender value of so much of said insurance policies, as may be required (A) for the purpose of paying future premiums with said proceeds, and (B) for the purpose of refunding to the life beneficiaries, out of said proceeds, so much of the income theretofore used by the Trustees in making payment of such premiums, with interest on such income, as may be required by virtue of any such decision or rule to reimburse said life beneficiaries for the income so used; and the Grantor directs the Trustees, upon the happening of said conditions, to pay out of such proceeds such insurance premiums as may be necessary to keep such policies in full force during the life of the Grantor, and to make such reimbursement of the life beneficiaries out of said proceeds.
The individual trustees of this trust were business associates of decedent. Ganter was a member of the law firm which drafted the trust and which had served as attorneys to Garrett Co. from 1917 to 1929, when the firm dissolved and Ganter retired from active practice. Hope was treasurer of the company until his resignation in 1939, after a stroke. At that time he also resigned as trustee. Ganter resigned as trustee on January 25, 1940, and was succeeded by Hugh Fulton. Hope was succeeded by Howard Paulsen, son-in-law of decedent and now president of the company.
The trustees independently conducted the affairs of the trust without interference by decedent.
The securities included in the trust had been purchased for decedent by Hope. After consultation with investment houses Hope and Ganter selected the ones most appropriate.
The availability of the large sums of money on the liquidation of the wine inventory by reason of national prohibition was the occasion for the creation of the 1923 trust. Decedent's friends and business associates advised favorably as to the arrangement because decedent's business experience was primarily in the wine business, the future of which was limited and problematical.
From the creation of the 1923 trust to the date of decedent's death, the gross income under Trust Fund No. 1 was $525,170.22. Distributions therefrom were in accordance with the provisions of the trust, and were as follows:Page 496
Evelyn E. Garrett ............................. $346,616.12 Insurance premiums ............................ 147,293.58 Commissions to trustees, etc. ................. 24,566.49 Miscellaneous small payments .................. 98.12
During the same period gross income under Trust Fund No. 2 was $172,823.57. Distributions therefrom were in accordance with the provisions of the trust, and were as follows:
Charles W. Garrett ........................... $21,968.89 Evelyn C. Garrett (Paulsen) .................. 44,588.35 Dorothy V. Garrett (Weed) .................... 44,588.35 Mary E. Garrett (Barden) ..................... 44,588.35 Commissions to trustees, etc. ................ 12,814.98
At no time during the same period did the trustees surrender any of the insurance policies for their cash surrender values, nor did they borrow on any of them.
Disbursements from principal of Trust Fund No. 1, in accordance with the provisions of the trust, were made as follows:
To Charles W. Garrett on attaining the age of 25 ...... $25,000 To each of the 4 children on their respective marriages ......................................... 10,000 To each of the 3 daughters on the third anniversaries of their respective marriages ..................... 10,000 and on the fifth anniversaries thereof .............. 5,000
To help meet these payments a sale of bonds on the marriage of Charles on June 29, 1927, yielded $10,000. Additional bonds were sold in July 1928 for $25,000.
Charles died without issue January 18, 1930. His widow subsequently remarried.
The value of the assets in Trust Fund No. 1 at the date of decedent's death was $874,671.83, of which $261,244.76 was derived from the insurance. The value of the life estate therein of the widow "in possession and enjoyment prior to the decedent's death" was $104,579.87, which respondent deducted in his notice of deficiency.
The only security continuously within the principal of this trust was $50,000 of City of Memphis, Tennessee, bonds.
In addition to the policies enumerated in this trust agreement of 1923 decedent carried other insurance policies upon his life amounting to $43,147.92. The exemption of $40,000 allowed by law was taken by the executors of his estate in the Federal estate tax returns.
Under date of April 4, 1929, the Garrett Holding Corporation was incorporated under the laws of the State of New York. Original subscribers for stock were noted in a certificate of incorporation for one share each, as the decedent, his son Charles, and J. Campbell Moore. Acknowledgment of the instrument was before John J. Hyland, who was attorney for the corporate organization of the Garrett Holding Corporation, including the matters relating to thePage 497real estate of that company and the drafting of its minutes, and the trust instrument dated September 7, 1929. Hyland's office was located at Penn Yan, New York. Hyland died subsequent to the death of decedent.
The amount of capital stock authorized by the certificate of incorporation was $1,000,000, being 10,000 shares of common stock at a par value of $100 per share.
The first meeting of subscribers to stock was held on July 22, 1929, in Hyland's office, with Moore and decedent present in person, and Charles represented by proxy. Charles went to the hospital in May of 1929, shortly after the company was incorporated, and died January 18, 1930. Decedent was elected chairman of the meeting and Moore, secretary. In addition to recording the filing of the certificate of incorporation, the minutes of the meeting state:
The Chairman explained to the meeting that it was proposed to convey to the corporation all the real property situate in the Towns of Jerusalem, Barrington and Milo, in the County of Yates, and property designated as "Trimyer Property" near Norfolk, Virginia. The record title to which properties are held by Paul Garrett, Evelyn E. Garrett, Charles W. Garrett, and Charles W. Garrett, trustee in various parcels and acreage. And it is then proposed to issue the common stock of said corporation to trustees for various members of the Garrett family and some of said stock directly to Evelyn E. Garrett and Paul Garrett. The amounts of such stock and the manner of its issuance to be hereafter determined by the Board of Directors. It being the thought to create a Trust for the management and distribution of the dividends upon such stock. The Chairman, however, explained that this matter was merely in a formative stage, the details of which would be worked out at a later date and would be carried into effect by the Board of Directors.
It was also explained by the Chairman that it was intended that all tools, machinery, implements and other articles of personal property used on or pertaining to the several parcels of realty, be also transferred to the Corporation.
The following resolution was then offered and adopted by the affirmative vote of the subscribers representing all the subscribed shares of stock in said corporation:
"Resolved, that it is the sense of this meeting that the general proposition, outlined by the Chairman, be carried into effect and that the Board of Directors are hereby authorized to do any and all things which are necessary to consummate the proposal and to issue the stock of said corporation in accordance with law, as in their discretion is for the benefit of the Garrett family and in such a manner as will have the approval of Paul Garrett. The acceptance of conveyances of the real and personal property is hereby approved."
On July 16, 1929, Charles conveyed to Garrett Holding Corporation, by deed executed by himself and wife, 5 separate parcels of real estate located in the general vicinity of Penn Yan comprising about 407 acres and having value in excess of mortgages of $36,600. On the same date Charles, as trustee for his sister Evelyn, conveyed to Garrett Holding Corporation approximately 37 acres of similarly located property having a value of approximately $7,000 free and clear of encumbrances.Page 498On July 22, 1929, decedent's wife conveyed to Garrett Holding Corporation 7 or 8 separate parcels of similarly located real estate comprising about 200 acres of a value of $48,700, free and clear of encumbrances. On the same date decedent conveyed to Garrett Holding Corporation by deed executed by himself and wife about 6 separate parcels of similarly located real estate comprising about 300 acres with a value of $13,900 over and above mortgages. The foregoing deeds were recorded February 5, 1930.
At the time the Garrett Holding Corporation was organized decedent held title as trustee for his daughter Dorothy to a similarly located tract of land. Beneficial ownership of this tract was transferred to the Garrett Holding Corporation in September 1929, but inadvertently legal title was not conveyed until 1941, when the executors delivered a deed for the property. The value of the property when it became the property of Garrett Holding Corporation was $13,000, as the net value over and above mortgages.
All of the mortgages on the properties were assumed by Garrett Holding Corporation.
Records kept for the Garrett Holding Corporation by Moore indicate transfers by decedent to the Garrett Holding Corporation on the date set forth of securities and equipment of a value as follows:
Date Item Value
SECURITIES TRANSFERRED
4-15-29 500 Electric Bond Share pfd ..................... $52,875.00 7-9-29 150 United Light Power pfd ...................... 15,000.00 8-29-29 300 Associated Telephone Utilities com ............ 10,500.00 10-25-29 250 Units (1 com., 2 pfd.) American Capital Corporation ................................... 24,500.00 11-1-29 150 American Superpower pfd ....................... 14,850.00 100 American Rolling Mills com .................... 12,575.00 200 Crosley Radio com ............................. 12,635.00 1,300 shares Kreuger Toll ....................... 17,415.61 1-1-30 500 Associated Telephone Utilities pfd ............ 47,000.00 2-7-30 15 Associated Telephone Utilities 5 1/2s .......... 14,850.00 2-18-30 250 American Superpower pfd ....................... 24,250.00 8-11-30 9,372 Garrett Co. com ........................... 187,440.00 2-28-31 200 American Foreign Power pfd .................. 16,400.00 5-16-31 European Electric warrants .................... 690.00 9-28-31 Adwell Electric warrants ...................... 4,160.90 1-31-33 25 Lantaro Nitrate bonds .......................... 24,093.75 ------------ 479,235.26
EQUIPMENT AND SUPPLIES
1-1-30 Y and E safe ...................................... $458.05 2-28-30 Y and E office equipment (F and F) ................ 113.50 3-31-32 Horse ............................................. 125.00 ----------- Total ......................................... 479,931.81
Decedent paid off and discharged mortgages against the realty in the amount of $9,201.46.
SECURITIES TRANSFERRED
4-15-29 500 Electric Bond Share pfd ..................... $52,875.00 7-9-29 150 United Light Power pfd ...................... 15,000.00 8-29-29 300 Associated Telephone Utilities com ............ 10,500.00 10-25-29 250 Units (1 com., 2 pfd.) American Capital Corporation ................................... 24,500.00 11-1-29 150 American Superpower pfd ....................... 14,850.00 100 American Rolling Mills com .................... 12,575.00 200 Crosley Radio com ............................. 12,635.00 1,300 shares Kreuger Toll ....................... 17,415.61 1-1-30 500 Associated Telephone Utilities pfd ............ 47,000.00 2-7-30 15 Associated Telephone Utilities 5 1/2s .......... 14,850.00 2-18-30 250 American Superpower pfd ....................... 24,250.00 8-11-30 9,372 Garrett Co. com ........................... 187,440.00 2-28-31 200 American Foreign Power pfd .................. 16,400.00 5-16-31 European Electric warrants .................... 690.00 9-28-31 Adwell Electric warrants ...................... 4,160.90 1-31-33 25 Lantaro Nitrate bonds .......................... 24,093.75 ------------ 479,235.26
EQUIPMENT AND SUPPLIES
1-1-30 Y and E safe ...................................... $458.05 2-28-30 Y and E office equipment (F and F) ................ 113.50 3-31-32 Horse ............................................. 125.00 ----------- Total ......................................... 479,931.81
At a meeting of directors of Garrett Holding Corporation in the office of Hyland on September 7, 1929, a quorum consisting of decedent, Moore and Hyland were present. Officers were elected to hold officesPage 499until election of successors, as follows: president, decedent; vice president, Evelyn E. Garrett; vice president, Hyland; secretary and treasurer, Moore. A resolution was unanimously adopted calling for the issuance of the common stock as follows:
Evelyn E. Garrett, Charles W. Garrett and Howard C. Paulsen as trustees for Charles, Evelyn Paulsen and Dorothy and Mary Garett .............................. 6,660 Decedent ............................................... 1,667 Evelyn E. Garrett ...................................... 1,666
A resolution was also carried authorizing decedent as president of the corporation to execute in the name of the corporation a trust agreement by the corporation as party of the first part and Evelyn E. Garrett, Charles W. Garrett, and Howard C. Paulsen as trustees. Authorization was also given to Moore to purchase, in the name of the corporation, securities for the purpose of investment and resale, he being given authority to handle such transactions as he deemed prudent and for the best interest of the corporation.
The stock of Garrett Holding Corporation was not issued until January 25, 1933. The delay was occasioned by tax difficulties with the State of New York over capital stock valuation and by resolution the board of directors amended the charter to reduce the capital stock to 1,000 shares without par value. When the stock was actually issued 666 shares were issued to the trustees, 167 shares were issued to Evelyn E. Garrett, and 167 to decedent.
The trust agreement heretofore mentioned was executed September 7, 1929, Evelyn E. Garrett, Charles W. Garrett, and Paulsen being named as trustees. The property was to be divided into four equal shares. The trust directed the payment of the net income of one share to each of the beneficiaries, and upon their death to pay the principal to their lawful issue or descendants. On death without issue but leaving surviving spouse, the income was to be paid to the surviving spouse until remarriage and thereafter if the trustees, in their discretion, saw fit. It was also provided that if any of the children desired to use a portion of the principal of their respective shares of the trust fund for a purpose promising to be a sound business investment in the opinion of the trustees, they could receive up to 25 per cent in any five-year period, not to exceed in the aggregate 75 per cent of the total share. Should a beneficiary die without issue or surviving spouse his share was to pass to the other beneficiaries and:
Fifth: If all of the beneficiaries of this Trust shall predecease Paul Garrett, without leaving issue them surviving, this Trust shall terminate and the principal and undistributed accumulations thereon, shall be paid to Paul Garrett.
Sixth: In the event all of the beneficiaries should survive Paul Garrett and predecease Evelyn E. Garrett, wife of Paul Garrett, without leaving issue, this Trust shall terminate and principal and undistributed accumulations thereon, shall be paid to Evelyn E. Garrett, wife of Paul Garrett.Page 500
It was also provided that during the minority of any of the children their share of income could be used, in the judgment of the trustees, for their maintenance and education, the balance to be accumulated and distributed on the child's reaching 21. Any vacancy in the office of trustee was to be filled, with preference being given to any son-in-law of decedent. The instrument recited that it was the intention that the stock of the Garrett Holding Corporation would constitute the corpus of the trust, the trust income being derived from dividends thereon. However, in case of an emergency the trustees were given authority to sell such stock.
The trust agreement was executed "GARRETT HOLDING CORPORATION by Paul Garrett, President" and attested by Moore as secretary, and an acknowledgment by Paul Garrett. There were also affixed the signatures and acknowledgments of the three trustees.
The value of the corpus of this trust at the time of decedent's death was $513,282. The value of the share of Garrett Holding Corporation stock issued in the name of Evelyn E. Garrett at the date of decedent's death was $128,282.
One of the motives in organizing the Garrett Holding Corporation grew out of losses from the operation of the farming properties at Penn Yan which had been borne by the several family holders of title. It was planned to get the properties into one unit and let decedent meet the losses. Decedent was to contribute securities to pay the expenses of the operation of the properties. Decedent contemplated that his Garrett Co. stock would be one of the securities going into the Garrett Holding Corporation. It was expected that Charles would be active in the operations and maintain the books of account, but he went to the hospital shortly after the Holding Corporation was incorporated. Moore did nothing about starting any books until after Charles died, because it was anticipated that Charles would come back. After Charles' death Moore took it on himself to set up the books of account because there was no one else to do it. He had no experience as a bookkeeper beyond his personal records. He had entered the employ of Garrett as an office boy in 1901, and is now an officer. The books he endeavored to set up for the Garrett Holding Corporation were a combined journal, cash book, and ledger. Moore also maintained separate books of account for decedent, on which he made entries which he saw fit, without consulting decedent. His services in this regard were gratuitous. At the date of decedent's death, as a result of the various entries of debits and credits, there was owing by the Holding Corporation to decedent $31,130.96.
When the properties and securities were contributed the entire amount was credited to the personal account of decedent irrespective of the source. The Garrett Holding Corporation books were set up by Moore in 1930, as of January 1. There was set up on the booksPage 501a personal account of decedent. All of his contributions to the Corporation were entered as credits, and disbursements made by the corporation for his personal benefit were charged as debits.
From the period January 1, 1930, to December 31, 1932, the personal account of decedent on the books of Garrett Holding Corporation totaled credits of $819,718.01 and debits of $333,626.80, leaving a credit balance of $486,091.21. When Moore set up a capital and surplus account for the Garrett Holding Corporation in 1933, it was entered as $487,091.21, approximately decedent's credit balance on the books on December 31, 1932.
Some of the Garrett Holding Corporation funds were used for and on behalf of decedent's personal affairs. Repayments were made at intervals and corporation expenses were paid out of personal advances.
The minutes of Garrett Holding Corporation, until the time of decedent's death, disclosed no dividends declared nor any activity except of a formal nature, although it apparently operated the farms properties. Decedent had unfettered control of the corporation at all times.
After decedent's contributions to the Garrett Holding Corporation, he still possessed an estate having a value of $800,000.
By decedent's last will and testament executed July 6, 1935, he appointed as executors and trustees of his estate the same persons acting under the 1929 trust agreement. They were to distribute the income as follows:
To my wife, Evelyn E. Garrett, for and during the term of her natural life and at her death, I direct that the principal of said Trust shall be paid to the Trustees acting under the above mentioned Trust Agreement with Garrett Holding Corporation, dated September 7, 1929, to be administered according to the terms of such Trust Agreement.
When Charles died on January 8, 1930, Moore was appointed successor trustee.
The creation of the trust by Garrett Holding Corporation was conducted as it was at the suggestion of Hyland. Instead of issuing stock to each person and each person creating a separate trust Hyland thought it would simplify the matter to create only one trust and have the corporation do it.
Decedent's 167 shares of Garrett Holding Corporation stock were transferred by him to a charitable trust for the support of the Garrett Memorial Chapel — a memorial to his son Charles. In 1941 decedent's wife transferred her 167 shares of Garrett Holding Corporation stock to her 3 daughters. Both the transfer by decedent and his wife were reported through gift tax returns.
The condition of decedent's health in 1923 and 1929 when the trusts were created was good.Page 502
Decedent suffered a loss in the early thirties of more than $500,000 on an investment in a North Carolina bank. The estate tax return discloses other investments held by decedent which were regarded as worthless at his death.
On November 30, 1923, the immediate family of decedent was composed as follows:
Evelyn E. Garrett, widow of decedent, born February 18, 1876.
Charles W. Garrett, son, born June 10, 1903, and died January 18, 1930.
Evelyn Garrett Paulsen, daughter, born April 12, 1907, later becoming wife of said Howard C. Paulsen, born January 17, 1905.
Dorothy Garrett Weed, daughter, born December 5, 1910, later becoming wife of Douglas B. Weed, born August 6, 1910.
Emily Garrett Barden, daughter, born September 8, 1912, later becoming wife of Lewellyn J. Barden, born September 29, 1912.
At the date of decedent's death all the foregoing were living except Charles; and in addition there were the following grandchildren:
Children of Evelyn G. and Howard C. Paulsen:
Evelyn C. Paulsen, born November 4, 1930.
Anne Shirly Paulsen, born January 18, 1935.
Charles Garrett Paulsen, born February 6, 1937.
Children of Dorothy G. and Douglas B. Weed:
J. Spencer Weed, born February 8, 1940.
Grandchildren born subsequent to date of decedent's death:
Children of Emily G. and Lewellyn J. Barden:
James L. Barden, born July 22, 1941.
Dorothy Anne Barden, born April 4, 1944.
The transfer in trust in 1923 of the assets comprising Trust Fund No. 1, to the extent of the insurance policies transferred, and to the extent of three-tenths of the other assets therein, was a transfer in contemplation of death within the meaning of the applicable provisions of the Internal Revenue Code.
The transfer in trust in 1923 of the remaining seven-tenths of the assets in Trust Fund No. 1 and all of the assets in Trust Fund No. 2 was not a transfer in contemplation of death within the meaning of the applicable provisions of the Internal Revenue Code.
The transfers in 1929, to the extent of those made by decedent himself, in his individual capacity, were transfers in contemplation of death.
The estate tax return filed for decedent's estate disclosed no net estate subject to tax. Respondent determined an estate of $1,390,095.95 for basic tax and $1,450,095.95 for additional tax and asserted the deficiency in question.Page 503
OPINION.
A comparable consideration applies to a part of the remaining 1923 transfer, known as Trust No. 1. Decedent's wife was the life beneficiary of a part of the income, and the record shows that a generous portion of the total income received by the trust was devoted, as it was presumably intended to be, to the periodic payments to her as life beneficiary. As to this, decedent's concern for the immediate welfare of the beneficiary must be recognized.
To our mind, however, this portion of Trust Fund No. 1 must be rigorously severed from the remaining portions of the same fund, and from the property transferred in 1929. Trust Fund No. 1, as to the balance, was in essence a life insurance trust. Its evident purpose was primarily to safeguard and keep in effect the considerable value of decedent's life insurance policies. Not only the policies themselves, but other property in the trust, consisting of income-bearing securities, partakes of that character, because by his arrangement with respect to it decedent has made it clear that his first preoccupation was with the use of that part of the income from the securities for the payment of current premiums on life insurance.
That his dominant motive was thus to preserve intact an estate which would come to fruition upon his death, is evident from the care with which these purposes were safeguarded by decedent's arrangements. By paragraph twelfth of the trust instrument the corporate trustee is absolved from "any obligation of any nature" as to the insurance policies, "other than the safekeeping thereof * * * and the payment, so far as may be necessary to keep said policies in full force, of the premiums thereon * * * out of the net income received by the Trustees upon said Trust Fund No. 1,during the life of theGrantor(which payment shall be regarded as an application ofthe income soPage 504used to the use of the respective beneficiaries of said TrustFund) * * *." (Emphasis added.)
The motivation which led decedent to take the action in question seems adequately reflected by the emphasis placed upon the use of that part of the income, not for the current needs during his life of the respective beneficiaries, but for the preservation of the insurance estate. If there could be gathered a purpose to make provision for the ultimate beneficiaries during decedent's life — a necessity diminished by the arrangements, in that respect made otherwise but contemporaneously — it would have to be viewed as secondary and not as that primary, compelling, or dominant reason about which the present problem revolves. SeeUnited Statesv.Wells,283 U.S. 102.
Several cases have arisen recently which have furnished the occasion for a consideration of a similar question. InVanderlipv.Commissioner,155 F.2d 152, affirming3 T.C. 358(certiorari denied,329 U.S. 728), Judge Learned Hand said for the Second Circuit Court of Appeals:
* * * A gift differs from a bequest, — apart from the inevitable loss of control over the property — only in so far as it secures enjoyment to the donee during the donor's life; and the donor's motives are relevant to exclude property only so far as they touch upon his enjoyment in that period. * * *
See alsoFirst Trust Deposit Co. v.Shaughnessy(C.C.A., 2d Cir.),134 F.2d 940; certiorari denied,320 U.S. 744.
And to quote fromThomasv.Graham(C.C.A., 5th Cir.),158 F.2d 561:
The trust merely kept in force decedent's life insurance policies during his life and economic benefits were intentionally and effectually withheld until after his death. Although the trial Judge found that the transfers were not made in contemplation of death, we are of opinion that a construction of the trust instrument demands a contrary finding.
See alsoUnited Statesv.Tonkin Peoples-Pittsburgh Trust Co. (C.C.A., 3d Cir.),150 F.2d 531; certiorari denied,326 U.S. 771;Davidsonv.Commissioner(C.C.A., 10th Cir.),158 F.2d 239.
It is true, of course, that not every transfer made to the natural objects of a decedent's bounty, even though its effect is to avoid estate tax, is a transfer in contemplation of death.Colorado National Bank of Denverv.Commissioner,305 U.S. 23;Allenv.Trust Co. of Georgia,326 U.S. 630. It must be equally true, on the other hand, that not every transfer, the effect of which is to remove property from the speculative risk of retention in a decedent's hands, is automatically eliminated as a transfer in contemplation of death. That is the result of all transfers in which decedent effectively withdraws from control. Such a motive, as the primary cause of a transfer,Page 505may well be one resulting from decedent's preoccupation with circumstances connected with his life, and thereby effectively remove the transaction from the scope of the contemplation of death provisions. SeeThomas C. Boswell et al., Executors,37 B. T. A. 970. Under such circumstances, if decedent retains the income, the transfer might be included in his estate if made after March 3, 1931 — not, however, as a contemplation of death arrangement, but because the expressed plan of the statute now includes it. Cf.Hassettv.Welch,303 U.S. 303. But the motive to preserve the property as a current source of income must be discernible as decedent's compelling concern. It is not inconsistent with a coordinate frame of mind comparable to testamentary concepts.Estate of Benjamin Franklin McGrew,46 B. T. A. 623; affd. (C.C.A., 6th Cir.),135 F.2d 158; seeDiamondv.Commissioner(C.C.A., 2d Cir.),159 F.2d 672. Whether the grantor takes that action with a dominant view to its effect upon the estate which will arise at his death, with testamentary motives, on the one hand, or, on the other, to immediate or intervening considerations, is the true test.
Neither would the fact that this transfer involved so heavily the aspect of decedent's life insurance of itself create an inference of contemplation of death. See Regulations 105, sec. 81.25. If insurance is transferred outright so that the donee is at liberty to use it or hold it to maturity as he may decide, the transaction may be similar to any gift of property. But where the intrinsic nature of the insurance itself is so markedly stressed, where the surrounding circumstances and integral features of the transfer so obviously indicate decedent's purpose to have the policies retained until they and his life terminate together, and in the meantime to have the trust income devoted to their preservation, it can not but demonstrate what the compelling purpose is, nor suggest that this purpose is other than testamentary.Estate of Arthur D.Cronin,7 T.C. 1403. By withholding from the donees the benefits of both property and insurance during the remainder of his lifetime,Vanderlipv.Commissioner, supra,by making evident his purpose to keep in force the life insurance policies until they should mature at his death,Thomasv.Graham, supra,the evidence of decedent's dominant objective is provided, which compels the ultimate finding that to the extent indicated the transfer was made in contemplation of death.
InEstate of Arthur D. Cronin, supra,the transfer involved solely insurance policies on decedent's life. As to that property, we held its proceeds entirely includible in the gross estate. A similar conclusion was reached inFirst TrustDeposit Co. v.Shaughnessy, supra. InThomasv.Graham, supra,the transfer was not only of life insurance, but also of income-producing assets, the avails of which,Page 506however, were evidently not designed to be in excess of an amount necessary to defray the current premiums on the insurance policies. In that case, both the insurance and the property used to sustain it were included in the gross estate.
These considerations do not, of course, apply to that part of Trust Fund No. 1 devoted to producing current income for the life beneficiary, which, as we have already noted, was set apart for a purpose to be anticipated during decedent's life. But the only difference here is that decedent placed in the same trust both property from which the income would be necessary to support the premium payments and also additional property which, as we have said, would not be so required, and whose use for purposes of aninter vivosnature was evidently intended. It is thus apparent that as to the life insurance policies and as to that part of the securities the income of which was necessary to keep them in force, decedent's motive was dominantly testamentary, and that accordingly as to that interest in the property, there was a transfer in contemplation of death. On the other hand, as to the securities whose function was to supply the surplus income available for decedent's wife, the life beneficiary, the transfer was for an immediate purpose and no similarity in nature to that of a bequest appears. The question is, How is a transfer of that nature to be treated?
We regard the answer as supplied by the statute and the long standing regulations promulgated under it. The language of the provision in question is that there is to be included in the gross estate property "to the extent of any interest thereinof which the decedent has at any time made a transfer by trust or otherwise in contemplation of * * * his death." (Emphasis added.) The regulations in effect at the date of death amplify the language as follows:
* * * If a portion only of the property was so transferred as to come within the terms of the statute, only a corresponding proportion of the value of the property should be included in ascertaining the value of the gross estate. [Regulations 105, sec. 81.15.]
That the insurance policies and the securities devoted to their preservation do not constitute the entire fund need thus not obscure the fact that the decedent himself by his divergent treatment has created the segregation. We see no reason for excluding the property completely where decedent's own dispositions indicate a different motive with respect to the several parts. His aim and intent being the controlling factors, we think effect must be given them by a corresponding separation.
Since we have concluded that the securities are to be treated according to the purpose to which decedent designated that their income should be devoted, and since there is no reason to assume that thePage 507actual application of the income was not in accord with the decedent's anticipatory intention, the portion of the securities valued as of the date of death should be included in the estate which the income paid for the life insurance premiums bears to the total distributable income. The record shows that, out of approximately $500,000 of distributable income, about $350,000 was paid to the life beneficiary and about $150,000 was devoted to the maintenance of the life insurance. Making the certainly not unreasonable assumption that this actual application of the income was the effectuation of the decedent's original intention, we conclude that in addition to the proceeds of the policies themselves, three-tenths of the value of the securities in the trust is includible in the gross estate as property transferred in contemplation of decedent's death, and the remaining seven-tenths is not so includible.
The 1929 transfer is different from that of 1923, and yet necessarily related to it. That a decedent should form a consistent purpose with respect to the disposition of his property, even though carried out in installments over a period of years, appears to us sufficiently reasonable so that the continuation of that policy by means of the subsequent action both confirms the conclusion as to the earlier trust and furnishes some evidence of the dominant motive leading to the subsequent transfer.
Considerations similar to those under the 1923 arrangement apply to the trust created in 1929. The aspect of life insurance is absent. But under that transfer petitioner, by means of the intervening subservient corporation and the control which he exercised through the corporation and trust, together, effectively withheld from the donees during decedent's life all benefits from that part of the fund which he had contributed.
Here the connection between the decedent's formal testamentary dispositions and the operation of the trust is revealing. The will which was probated was executed in 1935, six years after the creation of the trust, but only 21/2 years after transfer to it in 1933 of the assets composing it, and about the same length of time after decedent's last transfer of securities to the intervening corporation. The record does not disclose whether there was an earlier will or what its provisions might have been. But we do know that in the will which became effective, the same persons were appointed as executors and trustees as were the trustees under the 1929 trust. The beneficiaries were the same. And after the death of decedent's wife, the life income recipient under both will and trust, the property itself was to be transferred to the same trustees explicitly for administration as a part of the 1929 trust.
The entire record thus confirms decedent's testamentary motive as to the two trusts, and manifests the essential unity of decedent's will,Page 508his life insurance, and theinter vivostransfers of his own property. We do not, however, accept respondent's position that property transferred at the same time to the 1929 trust by others is also includible. We have accordingly concluded, as incorporated in our findings of fact, that only to the extent indicated these transfers were made by decedent in contemplation of his death.
Reviewed by the Court.Decision will be entered under Rule 50.
The majority opinion holds that, although the transfer of seven-tenths of the securities was not "made in contemplation of death" in either of the senses we have just mentioned, nevertheless the transfers of the insurance policies and three-tenths of the securities were testamentary in character and, therefore, were made "in contemplation of death" within the meaning of the applicable statute. We can not agree to this conclusion. We do not think it is supported by the facts embodied in the findings of fact. The majority opinion almost says, though not quite, that the transfer to a trust of an insurance policy on the transferor's life is necessarily testamentary in character and therefore made in contemplation of death. The majority opinion concedes that a transfer of an insurance policy may resemble a gift, but deduces the "decedent's purpose to have the policies retained until theyPage 509and his life terminate together"; stresses that trust income was to be used in part for premiums; and then concludes that the purpose of the transfer was testamentary. It is evident that decedent contemplated a continuation of the trust and a distribution of trust income long after his death at all events, and hence the only effect of his death would be to increase the corpus from which income could be derived and to increase net income by elimination of the premium payments. It seems to us that the policies were an asset of the trust, like other assets; they had been taken out one by one since 1890, and, so far as we can see, should be treated in the same way as all the rest of the property which was transferred to the trust.
Apart from the normal incidents of insurance, the majority opinion finds nothing to indicate contemplation of death as a motive for creating the trust. Inferentially, we think the majority would have found no such motive if mortgaged real estate had been transferred in trust and if trust provisions had required that trust income be used to pay off the mortgage debt. Such use would have built up the corpus of the estate; so here, the use of income for premiums built up corpus. In the absence of a general contemplation of death when the trust was formed, we fail to see any good reason why the transfer of insurance policies, taken out years before, is to be differently considered merely because their payment is conditioned on decedent's death. And this view gains strength from the fact that section 811 (g) of the Internal Revenue Code specifically provides for the inclusion in gross estate of the proceeds of insurance policies receivable by others than the insured's estate if the premiums were paid by the insured or if the insured possessed at death any incidents of ownership. Implicitly such proceeds are not to be included in the absence of these conditions, and it is obvious that these conditions were missing here. Decedent had relinquished all powers over the policies and the trust, not he, paid the premiums.
The majority opinion, in reaching the conclusion that the value of the insurance policies and three-tenths of the value of the securities should be included in decedent's estate because the transfer of them to Trust No. 1 was made in contemplation of death, relies heavily uponVanderlipv.Commissioner,155 F.2d 152;First Trust Deposit Co. v.Shaughnessy,134 F.2d 940; andThomasv.Graham,158 Fed. 2d 561. In our judgment these cases are distinguishable on their facts. In theVanderlipcase the facts briefly were these: Before 1918 the testator had taken out policies of life insurance aggregating nearly a million dollars, upon which he had borrowed before June 1, 1932, all that the insurers would lend. On that day he delivered and assigned all the policies to four trusteesPage 510upon trust to hold them until they became payable and then to collect them and hold the proceeds as the principal of a trust fund. The deed gave power to the trustees to use all dividends declared to pay premiums and interest on the loans and to borrow upon the policies for the same purpose. Furthermore and most important of all, it was stipulated that the gift of policies "was motivated solely by the decedent's desire to avoid estate taxes and was not otherwise made in contemplation of death within the meaning of the Revenue Acts of 1926 and 1932 as amended or of the regulations thereunder."
We have no stipulation of facts in the instant case or finding of fact that the decedent made the transfers solely to avoid estate taxes. If we did have such a stipulation of fact or finding, then of course we would hold that the value of the entire property transferred to Trust No. I and not just the insurance policies and three-tenths of the securities should be included in decedent's estate. SeeEstate of Frank A.Vanderlip,3 T.C. 358; affd.,Vanderlipv.Commissioner,supra.First Trust Deposit Co. v.Shaughnessy, supra,is distinguishable on the same ground as theVanderlipcase. In fact, in theVanderlipcase we relied on theFirst TrustDeposit Co. case as one of the controlling authorities.
InThomasv.Graham, supra,the Fifth Circuit reversed the United States District Court for the Northern District of Texas and held that decedent's community interest in certain securities and policies of insurance transferred to a trust by decedent and his wife on October 12, 1936, were includible as a part of decedent's estate under section 811 (c) on two grounds, (1) because of a possibility of reverter by operation of law and (2) because the transfer was made in contemplation of death. The holding of the court on the second ground was briefly stated and was based on the finding that the deed of trust was nothing more than a substitute for a testamentary disposition of the property within the meaning of the statute and section 81.16 of Treasury Regulations 105. If the language of the court in thisThomasv.Grahamcase,supra,is to be construed as holding that the mere fact that insurance policies are transferred to a trust to be collected on decedent's death and become a part of the corpus of the trust means that such a transfer is made in contemplation of death and the proceeds of the policies must be included as a part of decedent's estate, then, with all due respect to the court, we think the court is wrong and its decision is contrary to the weight of authority, particularly the reasoning of the Supreme Court inUnitedStatesv.Wells, supra.
For the foregoing reasons, we respectfully dissent from the majority opinion.Page 511