Court Opinion

ID: 4607039
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:39:47.679933+00
Date Added: 2024-06-11T07:53:28.601130
License: Public Domain

WILLIAM R. STEWART, MARY S. WITHERBEE AND SPOTSWOOD D. BOWERS, EXECUTORS AND TRUSTEES UNDER THE WILL OF LISPENARD STEWART, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Stewart v. CommissionerDocket No. 45282.United States Board of Tax Appeals27 B.T.A. 593; 1933 BTA LEXIS 1331; January 31, 1933, Promulgated *1331 Held, that respondent improperly included the corpus of certain trusts in petitioners' taxable estate.  Spotswood D. Bowers, Esq., for the petitioners.  Frank T. Horner, Esq., for the respondent.  VAN FOSSAN *593  This proceeding was brought to redetermine a deficiency in the estate tax alleged to be due from the estate of Lispenard Stewart, deceased, in the amount of $217,997.18.  All issues raised by the petition were settled by stipulation, except the following: (1) Whether or not the corpus of the four trusts involved is taxable under the provisions of section 302(d) of the Revenue Act of 1926 by reason of the provisions of the trust instrument permitting it to be altered, amended or revoked by the trustor with the consent of certain trustees, and (2) Whether or not the transfers effected by the trust instruments were intended to take effect in possession or enjoyment at or after death, as contemplated by section 302(c) of the said revenue act.  From the pleadings and stipulation of facts we make the following findings of fact.  FINDINGS OF FACT.  Lispenard Stewart died on October 15, 1927.  The petitioners are the duly qualified*1332  and acting executors and trustees of his estate.  On April 4, 1923, Lispenard Stewart created three trusts for the benefit of Anita Braganca, Evelyn W. Miller and William Rhinelander Stewart, Jr., and named William Rhinelander Stewart, Mary S. Witherbee and Spotswood D. Bowers as trustees in each trust.  The corpus of each trust consisted of certain shares of the common stock of the Rhinelander Real Estate Company.  The pertinent provisions of the Anita Braganca trust are as follows: The party of the first part, in consideration of the premises, hereby assigns, transfers and sets over to the parties of the second part the following securities, to wit, eighteen hundred (1800) shares of the common stock of the Rhinelander Real Estate Company, To HAVE AND TO HOLD the said stock for and during the term of the natural life of Anita Braganca, widow of Prince Miguel of Braganca, upon the SPECIAL TRUST AND CONFIDENCE to invest the same *594  and to receive the income, rents, issues and profits arising therefrom; and after deducting the expenses of management, to pay the net income quarterly to said Anita Braganca during her life, and from and after her death to convey, assign, transfer*1333  and pay over the principal to the lawful issue of her body, per stirpes and not per capita; and in the event that she shall leave no such issue her surviving, then and in that event, to pay over said principal to William Rhinelander Stewart, Jr., and if he be then dead leaving lawful issue of his body him surviving, then to pay over said principal to such issue, per stirpes and not per capita; and if said William Rhinelander Stewart, Jr., shall leave no such issue him surviving, then and in that event, to pay over said principal to Evelyn W. Miller, and in case she be dead but leaving lawful issue of her body surviving, to pay over the principal to such issue, per stirpes and not per capita.  * * * IT IS FURTHER AGREED that in the event of any one of the parties of the second part dying, resigning the aforesaid trust, or becoming incapable to act in the same, the remaining trustees, or the executor or administrator of the last surviving trustee, may nominate and appoint by instrument in writing a new trustee to take the place of the trustee so dying or retiring, and when and as often as any new trustee or trustees shall be nominated and appointed as aforesaid, he shall act without*1334  giving security, and all the trust estate then remaining shall vest in such new trustee or trustees, either alone, or as the case may be, jointly with the remaining trustee, and upon the same trusts and with the same intents and purposes, and with the subject to the same powers and provisos as are hereinbefore declared and expressed of and concerning the same respectively; and that all and every trustee and trustees shall be vested with the said estate, and shall and may execute the aforesaid trusts and powers as fully and particularly as if he or they had been named as such trustee or trustees in this instrument.  * * * IT IS FURTHER EXPRESSLY AGREED between the parties hereto, that the party of the first part may at any time, and from time to time, with the approval of any two of said parties of the second part, or the survivors or survivor of them, of any of their or his successors or successor, alter, amend or extend all or any of the terms of conditions of this instrument, and may with like consent cancel, annul and revoke same, in which event, the trust property then in the hands of the parties of the second part which shall be retransferred to the party of the first part. *1335  In all three trusts the trustees were granted broad and exclusive powers to sell, substitute, reinvest, lease and otherwise manage the corpus of the trust.  The corresponding granting clauses in the other two trusts are similar in effect and the amendment and revocation clause and the clause relating to the substitution of trustees are identical in all three trusts.  On March 30, 1923, Lispenard Stewart established a trust fund of $30,000 for the benefit of Mary V. Heffernan.  The Fulton Trust Company of New York was named as trustee therein.  The amendment *595  and revocation clause in the trust instrument is identical with that contained in the three trusts above described, the approval of the single trustee being required.  The clause relating to the appointment of a new trustee is as follows: IT IS FURTHER AGREED that, in the event of the party of the second part resigning the aforesaid trust or becoming incapable of acting in the same, the party of the first part may nominate and appoint by instrument in writing a new trustee to take place of the trustee so retiring.  On September 12, 1923, the trustor amended the granting clause as follows: That in consideration*1336  of the sum of One Dollar ( $1). to him in hand paid by the party of the second part, the receipt whereof is hereby acknowledged, and other valuable considerations him thereunto moving, the party of the first part hath this day assigned, transferred and set over unto the party of the second part the sum of Thirty Thousand Dollars ($30,000) in cash, TO HAVE AND TO HOLD the same with all proceeds and reinvestments thereof unto the party of the second part or its successors, upon the SPECIAL TRUST AND CONFIDENCE that the said party of the second part shall receive said money and forthwith invest the same in securities approved by law for the investment of trust funds, and to hold said securities and all proceeds and reinvestments thereof for and during the term of the natural life of MARY V. HEFFERNAN, of Newport, Rhode Island, and to receive the income, issues and profits therefrom, and apply the same to the use, maintenance and support of the said MARY V. HEFFERNAN (quarterly, if possible); and from and after her death to hold said securities and all proceeds and reinvestments thereof for and during the term of the natural life of MARGARET FRANCIS HEFFERNAN, of Newport, Rhode Island, *1337  if she shall survive said MARY V. HEFFERNAN, and receive the income, issues and profits therefrom and apply the same to the use, maintenance and support of the said MARGARET FRANCIS HEFFERNAN (quarterly, if possible); and upon the death of both said MARY V. HEFFERNAN and MARGARET FRANCIS HEFFERNAN the principal of one-half of said trust fund and any accumulations of income shall be paid over to my niece, EVELYN W. MILLER, and in the case she be dead, but leaving issue her surviving, then and in that event same to be paid over to her children in equal shares per stirpes and not per capita, and in the event of her leaving no issue her surviving, then and in that event said one-half share shall be paid over to my niece ANITA STEWART BRAGANCA, widow of Prince Miguel Braganca, and to my nephew, WILLIAM RHINELANDER STEWART, JR., in equal shares, and in the event that either shall be dead, leaving issue, the share so directed to be paid over to such deceased shall be paid over to the issue of such deceased person per stirpes and not per capita, and in case either said ANITA STEWART BRAGANCA or WILLIAM RHINELANDER STEWART, JR. shall die without leaving issue living at said time, said fund*1338  shall be paid over to the survivor of said two persons, and in case they shall both be dead, but one shall leave issue surviving, then and in that event said principal fund shall be paid over to such issue per stirpes and not per capita.  One-fourth of the principal of said fund and any accumulations of income shall be paid over by said Trustee to ANITA STEWART BRAGANCA, and if she be dead, but leave issue her surviving, then said fund shall be paid over to her issue per stirpes and not per capita, and in the event that she shall leave no issue her surviving, *596  then and in that event the same shall be paid over to WILLIAM RHINELANDER STEWART, JR., and in case of his death to his issue per stirpes and not per capita, and in case of the death of said WILLIAM RHINELANDER STEWART, JR., without issue, then the same shall be paid over to EVELYN W. MILLER, and in case she be dead, to her issue per stirpes and not per capita.  The other one-fourth part of said principal and any accumulations of income shall be paid over to WILLIAM RHINELANDER STEWART, JR., and if he be dead, but leave issue him surviving, then the same shall be paid over to his issue per stirpes and not per capita; *1339  and if he shall die leaving no issue him surviving, then and in that event said fund shall be paid over to ANITA STEWART BRAGANCA, and in the event that she be dead, the same shall be paid over to her issue per stirpes and not per capita, and if she be dead and leave no issue, then the same shall be paid over to EVELYN W. MILLER, and in case of her death, to her issue per stirpes and not per capita.  In case of the death of said MARGARET FRANCIS HEFFERNAN, prior to the death of MARY V. HEFFERNAN, then and in that event I direct said trustee, from and after her death, to pay over the principal and any accumulations of income to William R. Stewart, Mary S. Witherbee and Spotswood D. Bowers, to be held by them in trust, as follows: The income, issues and profits from one-half part thereof to be paid to Evelyn W. Miller during her life, and upon her death the principal of said one-half part to be paid over to her children in equal shares, per stirpes and not per capita, and in the event of her leaving no issue her surviving, then and in that event the said one-half share shall be paid over to William Rhinelander Stewart, Jr. and Anita Stewart Braganca, widow of Prince Miguel Braganca, *1340  in equal shares, and in the event that either shall be dead leaving issue, the share so directed to be paid over to such deceased shall be paid over to the issue of such deceased person per stirpes and not per capita; and in case either said William Rhinelander Stewart, Jr., or Anita Stewart Braganca shall die without issue living at said time, said fund shall be paid over to the survivor of said two persons; and in case they shall both be dead, but one shall leave issue surviving, then and in that event, said principal fund shall be paid over to such issue per stirpes and not per capita.  One-fourth of said fund shall be held by said Trustees, and the income, issues and profits thereof paid over to William Rhinelander Stewart, Jr. during his life; and upon his death the principal thereof shall be paid over to his issue, per stirpes and not per capita, and if he shall die leaving no issue him surviving, then and in that event said fund shall be paid over to Anita Stewart Braganca, and in the event that she be dead, the same shall be paid over to her issue, per stirpes and not per capita, and if she be dead and leave no issue, then the same shall be paid over to Evelyn W. Miller, and*1341  in case of her death to her issue, per stirpes and not per capita.  The other one-fourth shall be held in trust, and the income, issues and profits paid to Anita Stewart Braganca during her life, and upon her death the principal of said fund shall be paid over to her issue, per stirpes and not per capita; and in the event that she shall leave no issue her surviving, then and in that event the same shall be paid over to William Rhinelander Stewart, Jr., and in case of his death to his issue, per stirpes and not per capita, and in case of the death of said William Rhinelander Stewart, Jr., without issue, then the same shall be paid over to Evelyn W. Miller, and in case she be dead to her issue, per stirpes and not per capita.  None of the four trusts above described was created in contemplation of death.  *597  All stock of Rhinelander Real Estate Company shown in the Federal estate tax return of the estate of Lispenard Stewart, and all stock of said company which is held in the above trusts or any of them, was of the fair market value at the time of the death of the decedent of $171.82 per share.  Item 1 of real estate shown in the Federal estate tax return of the estate*1342  was of the fair market value of $167,500 at the time of the death of the decedent.  Items 2 to 45, inclusive, of real estate, which were returned by the executors at a total of $306,080, and valued by the respondent at $551,386.66, were severally of the fair market value at the time of the death of the decedent as contended by the respondent; said several values aggregate $551,386.66.  The petitioners are entitled to deduction of $50,000 for attorneys' fees and $133,823.15 for commissions paid to executors.  The petitioners are entitled to a credit pursuant to section 301(b) of the Revenue Act of 1926, on account of state inheritance taxes paid, not in excess of the amount of such taxes actually paid up to 80 per cent of the Federal estate tax liability as finally determined.  Upon the basis of the respondent's determination of the tax liability of $323,754.35, the estate has established its right to a credit, under section 301(b) of the Revenue Act of 1926, of $259,003.48.  The stipulation contains the following provision which is pertinent and controlling in the final settlement of the tax: "If the estate should be entitled to a credit in excess of the said sum of $259,003.48, *1343  such excess credit will be settled by agreement under the Rule 50 settlement." OPINION.  VAN FOSSAN: Section 302 of the Revenue Act of 1926 provides: SEC. 302.  The value of the gross estate of the decedent shall be determined by including the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated - * * * (c) To the extent of any interest therein 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, except in case of a bona fide sale for an adequate and full consideration in money or money's worth.  * * * (d) 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 relinquished any such power in contemplation *598  of his death, except in case of a bona fide sale for an adequate and full consideration in money or*1344  money's worth.  * * * The respondent contends that the value of the property constituting the corpus of the trusts involved in this proceeding should be included in the gross estate of the trustor for Federal estate tax purposes, pursuant to the above provisions.  None of the trusts was created in contemplation of death.  The tax imposed by section 302(c) above is an excise tax on the transfer of an estate by death. ; ; ; . Consequently, when a trustor divests himself fully, completely and irrevocably of all interest in the trust which might inure to his benefit, at his death he is possessed of no interest therein which is subject to taxation under the above statute.  In , the Supreme Court of The United States said: * * * In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful*1345  whether the trusts or interests in a trust intended to be reached by the phrase in section 402(c) "to take effect in possession or enjoyment at or after his death," include any others than those passing from the possession, enjoyment, or control of the donor at his death and so taxable as transfers at death under section 401.  That doubt must be resolved in favor of the taxpayer.  * * * In the Braganca, Miller and Stewart trusts Lispenard Stewart transferred to the trustees certain shares of stock of the Rhinelander Real Estate Company.  Such transfers were made for and during the natural life of each beneficiary and after her or his death the trustees were directed to transfer and pay over the corpus of the trust to the beneficiary's lawful issue, and if none survived the beneficiary, to a designated remainderman; if such person were dead, then to his issue, etc.  The trustor retained neither control over the property transferred nor power of any kind over the trustees, divesting himself likewise of the economic benefits and enjoyment of the trust property.  See *1346 He retained no right of reversion or designation.  The right to alter, amend or revoke the terms of the trust instrument was reserved, but such right was to be exercised only with the approval of any two of the trustees.  The status of the possessor of the life interest and of the remainderman remained after the trustor's death precisely as it had been before that event.  The remainderman was to acquire possession of and title to the trust corpus upon the death of the life tenant, not of the trustor.  Cf. . The revocation *599  of the trust instrument by the trustor was an act not within his sole power to accomplish.  The Heffernan trust varies somewhat in terms, but the same principles apply to it.  The respondent contends, however, that the trustor in the case at bar had the power to alter, amend or revoke the trust instruments in conjunction with the trustees and that, therefore, the corpus is taxable under the provisions of the above section 302(d).  He asserts that the trustees should not be regarded as "adverse interests" as contemplated by the opinion*1347  in , which states: * * * Since the power to revoke or alter was dependent on the consent of the one entitled to the beneficial, and consequently adverse, interest, the trust, for all practical purposes, had passed as completely from any control by decedent which might inure to his own benefit as if the gift had been absolute.  We can not concur in the respondent's view.  There is imposed upon the trustee the duty to manage and conserve the estate committed to him for the benefit of those whose interests must be protected and preserved.  In the case before us the trustor transferred to the trustees the possession and title of the corpus unhampered by any restrictions or reservations whatever, with the single exception of the right to alter, amend or revoke "with the approval of any two of the trustees" in the three "family" trusts and with that of the Fulton Trust Company in the Heffernan trust.  It is immaterial whether, at the death of the trustor, the owner of the life estate happened to be enjoying the use of the property or the remainderman was entitled to the corpus itself. *1348  The duty of the trustee remained the same - to carry out the terms of the trust instrument.  Since the trustor had parted with the possession and all incidents of the ownership of the corpus, it may fairly be said that the trustee represented the beneficial interests primarily.  In , arising under the Revenue Act of 1926, the court said: The principles on which the trustee would have acted in giving or withholding assent are not very certain, but it certainly owed duties to other parties interested in the trust besides the settlor, and it might well have declined to assent to proposed changes which it thought unfair to them or inspired by improper motives.  It was not a mere rubber stamp; its judgment was required, and its assent might have been refused as well as given.  On appeal the United States Court of Appeals for the First Circuit affirmed the decision of the District Court, and in its opinion stated: The government now contends in effect that by subdivision (d) [of section 302] Congress has undertaken to impose a new form of excise tax, viz., a tax on the power to alter or revoke before death a trust created by the*1349  grantor, whether the power be of a general or limited nature.  We do not think Congress intended by the addition of subdivision (d) to add a new form of tax.  It was *600  only "to the extent of the interest" of the decedent in the trust fund, and at his death, that subdivision (d) adds anything to the value of the gross estate.  If the decedent had no beneficial interest in the trust fund at his death, under the construction of the Supreme Court in the above-cited cases, there was nothing transferred from him at death within the meaning of section 301, which imposes the tax.  * * * In other words, where a grantor, either alone or in conjunction with anyone not a beneficiary under the trust, has retained "the power to revest in himself title to any part of the trust," * * * then the body of the trust at the death of the decedent may be included in the value of the gross estate, but where the decedent has no such power except by the consent of an adverse party as one of the beneficiaries, or as in this instance of the trustee for the beneficiaries, the right of revocation is gone from the donor and also all beneficial interest for taxing purposes under section 301 of the act. *1350  To hold that Congress under subdivision (d) intended under the guise of a tax on the transfer of property at death to impose a tax solely on a limited power of appointment under it, would be contrary, not only to the spirit of the act, but the express terms of section 301 * * * and so doubtful a construction that the contrary intent should be resolved in favor of the taxpayer.  * * *.  In ; affd., , we had before us facts quite similar to those in the case under consideration.  There the trustor reserved the power to modify the trust instrument only by the joint written agreement of himself and five of the seven named beneficiaries, one of whom was the trustee.  We said that the trustee "acted as such for himself and the remaining six beneficiaries, all of whose interests were adverse to that of the decedent." See also . The respondent further contends that a potential beneficiary of a contingent interest does not become a cestui que trust until the use vests in him.  We have recently considered the same question in relation to income. *1351 . There we held that reservation of the power of revocation in conjunction with owners of contingent beneficial interests was sufficient to exclude the income arising from the corpus of the trust from taxation to the trustor.  See . So here the trustees representing beneficiaries of potential or contingent interests are "adverse" within the term as employed in In view of the foregoing we are of the opinion that the value of the corpus of the four trusts should not have been included in the estate of Lispenard Stewart, deceased, for tax purposes.  Decision will be entered under Rule 50.