Court Opinion

ID: 9442521
Source: CourtListenerOpinion
Date Created: 2023-08-03 18:50:45.956378+00
Date Added: 2024-06-11T17:29:07.312101
License: Public Domain

PHILLIPS, Chief Judge
(dissenting).
These are petitions to review a decision of the Tax Court determining a deficiency in estate tax of $62,777.40 upon the estate •of Paul Loughridge.
No. 3993.
Paul Loughridge1 died testate February 26, 1943. On April 13, 1943, his widow, Marjorie Loughridge, was duly appointed and qualified as executrix of his estate. Decedent also left surviving him four minor children, Paul Loughridge, Jr., born May 31, 1925; 'Charles Loughridge, born June 19, 1926; Ruth Loughridge, born October 27, 1927, and Alice Loughridge, born Juñe 29, 1932.
On July 16, 1929, a declaration of trust2 was executed by the decedent as donor and by the decedent and Marjorie Loughridge as trustees, for the benefit of their children, Paul Jr., Charles and Ruth. It reserved power in the original trustees, or the survivor of them, at any time and from time to time, to “alter, amend or extend all or any of the terms and conditions of the trust.”
On July 15, 1929, decedent caused to be transferred to the Children’s Trust securities of the value of $128,561.50. On January 1, 1935, decedent transferred to the Children’s Trust additional securities of the value of $2,940.62.
On November 15, 1935, after the birth of Alice, the trust declaration was amended to include Alice, and the decedent transferred to the trust securities of the value of $45,062.50, which was approximately equal to the interest of each of the three other beneficiaries, as of that time.
On December 27, 1935, decedent and Marjorie Loughridge, acting under their respective powers to alter and amend the Children’s Trust, together with the United States Trust Company of New York, executed a modifying trust instrument. Under the modified trust instrument, the decedent and Marjorie Loughridge resigned as trustees and transferred to the United States Trust Company, as trustee, all of the trust property, and the trust property was divided into four equal shares and one share was set apart in trust for each of the four children. The amended declaration of trust provided that during the minority of each child the income from his share should be accumulated and paid over to him upon his attaining the age of 21 years, if living, and that thereafter, during the continuance of the trust, he should receive current income from his share, if living, but that if any *304child should die before attaining 21, the accumulated income of his share should be paid to those persons who would take the principal of his share, and if any child died after attaining-21 and before termination of the trust, the iricome of his share should be paid to his surviving issue, per stirpes, and if there were none, then to decedent’s living children in equal shares, or their surviving issue; and that’ the trust for each child should terminate when the younger of Charles and Ruth then living attained the age of 40 years, or upon the death of the survivor of 'Charles and Ruth before attaining the age of 40 years, and that upon such termination each child’s share should be transferred to him absolutely in fee simple, if living, but if dead, then as directed by his will, but if he should fail to exercise his power of appointment, then to his surviving spouse or issue, and if there should be no surviving spouse or issue, then to Marjorie Loughridge, and if she be dead, to her estate.
The amended trust instrument further provided: • •
“Second: The Trustee is authorized and empowered, iñ case, at any time or from time to time prior to the termination of the trust above provided for as to any share of the Trust Fund, it shall, in its absolute discretion, determine that it is for the best interests of the beneficiary thereof that the trust as to such share of the Trust Fund be terminated as to the whole or any part or parts of such share, to terminate the trust of such share as to the whole or such part or parts thereof by an instrument or instruments, in writing, and thereupon it shall be the duty of the Trustee to assign, transfer, pay over and deliver, absolutely and in fee simple and free and discharged of all trusts, the whole of such share of the Trust Fund or such part or parts, thereof as the case may be, unto the beneficiary of such trust.
* * * * * * ,■
“Twelfth: The Trustee, upon written notice from Paul Loughridge, shall, or may if it so desires, upon written notice addressed to him (or if he be not living, to Marjorie Mead Loughridge), resign as Trustee hereunder; such resignation shall become effective on the day specified in the notice from Pául Loughridge, or that given by the Trustee, which shall be not less than thirty days subsequent to the delivery of such notice to the Trustee or the mailing of such notice by the Trustee. If such resignation is upon notice from Paul Lough-ridge, the Trustee shall be entitled to all commissions to which it would be entitled if the trust were then to terminate.
“In case of the resignation of the Trustee, said Paul Loughridge, or if he be not then living, Marjorie Mead Loughridge, may, by an instrument in writing duly executed and acknowledged, appoint a successor trustee, and upon such appointment such trustee shall have all the rights and powers, discretionary or otherwise, which are herein given to the Trustee.
“Thirteenth: From and after the date of execution of this instrument and its delivery to the Trustee, the said Paul Loughridge and Marjorie Mead Loughridge shall have no power further to alter, amend or extend all or any of the terms and conditions of the trust, nor shall the Trustee have any such power.”
The United States Trust Company acted as trustee until 1944, at which time it resigned and Marjorie Loughridge appointed the Colorado National Bank of Denver, Colorado, as successor trustee.
In the estate tax return for decedent’s estate no portion of the value of the corpus of the Children’s Trust was included in decedent’s gross estate.
The Commissioner determined that the entire value of the corpus of the Children’s Trust, which value was stipulated to be $214,572.13 at the date of decedent’s death, was includible in such gross estate for estate tax purposes. The Tax Court sustained such determination by the 'Commissioner.
Title 26 U.S.C.A. § 811 of the Revenue Code, in part, provides:
“§ 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 *305property, real or personal, tangible or intangible, wherever situated, except real property situated outside the United States— •
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"(d) Revocable transfers.
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“(2) Transfers on o-r prior to June 22, Í936-. 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 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 ;
“(3) Date of existence of power. For the purposes of this subsection the power to alter, amend, or revoke shall be considered to exist on the date of the decedent’s death even though the exercise of the power is subject to a precedent giving of notice .or even though the alteration, amendment, or revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent’s death notice has been given or the power has been exercised. In such cases proper adjustment shall be made representing the interests which would have been excluded from the power if the decedent had lived, and for such purpose if the notice has not been given or the power has not been exercised on or before the date of his death, such notice shall be considered to have been given, or the power exercised, on the date of his death.”
The question is whether decedent on the date of his death, February 26, 1943, had power to revoke or terminate the trust.3 That is the crucial date fixed by the statute, and the test laid down by Congress is whether, on that date, the decedent, through the exercise of a power to alter, amend, revoke or terminate the trust, could have changed the enjoyment of an interest therein.
Obviously, not being the trustee on the date of such death, the decedent had no such power. Counsel for the Commissioner argue that decedent could have removed the existing trustee and appointed himself as successor trustee, and therefore had such power to revoke or terminate at the time of his death. But the resignation of the existing trustee under the express terms of the trust could only become effective on the date specified in the written notice from the decedent, which could not be less than 30 days subsequent to the delivery of the notice to such trustee. It follows that unless § 811(d) (3) is applicable to the provision requiring a minimum of 30 days’ notice before the resignation of an existing trustee should become effective, the power to revoke or terminate the trust did not exist in the decedent at the time of his death.
Section 811(d) (3) does not apply to notice prerequisite to the removal of a trustee. By its terms it is expressly limited to the giving of notice that an alteration, amendment or revocation will be made, or notice that an alteration, amendment or revocation will become effective at the expiration of a stated period. It has no application to a notice of the future effective date of a resignation of a trustee. The resignation of a trustee and the appointment of a new trustee is not an alteration, amendment, or revocation of a trust. Section 811 (d) (3) is applicable only to situations where the power exists at the date of the decedent’s death, but prerequisite to its exercise, or to it becoming effective, notice must be given. In such cases, the notice is considered as having been given and the existing power exercised at the date of the death of the decedent.
In the instant case a minimum of 30 *306clays’ notice had to he given before the then trustee could be removed and the new trustee appointed. During the notice period the power to revoke or terminate remained in the then trustee, and during such period, he, not the decedent, could revoke the trust. The giving of notice for the specified period was a condition which had to be fulfilled before the trustee could be removed and a new trustee appointed and invested with the power to revoke or terminate the trust. Hence, it is my opinion, that the trust property was not subject at the time of decedent’s death to any change through the exercise of a power by the decedent to alter, amend or revoke the trust.
Moreover, the Children’s Trust is, by its express terms, a New York trust and is governed by the laws of that state. The power of the decedent to appoint himself successor trustee, on the resignation of the existing trustee, must be determined by the law of New York. Since the decedent, if he appointed himself trustee, would receive commissions and other personal benefits, I sincerely doubt that under the laws of New York he could have legally appointed himself as successor trustee:4
No. 3994.
Fred H. Harmon, an uncle of the decedent, died on April 21, 1941. On May 28, 1929, Harmon created an irrevocable trust. Under the provisions thereof, on Harmon’s death the trust terminated and one-half of the corpus went to the decedent and one-half to John H. Mclllvaine, another nephew of Harmon. On July 6, 1942, a Federal estate tax return was filed for the estate of Harmon, which valued the assets of the trust at $430,716, as of the optional valuation date, which had been elected, and further stated that all of the property in the trust, with the exception of $26,733.27 of cash additions, came into the trust prior to March 3, 1931, and were not includable in the gross estate. On the basis of its return the Harmon estate paid an estate tax of $97.74.
The Commissioner included all of the property of the Harmon trust in the Harmon gross estate and solely by reason thereof, on March 23, 1943, determined a deficiency of $73,563.54. On June 10, 1943, the estate filed its petition for review in the Tax Court, assigning as error the action of the Commissioner in including the whole of the. Harmon trust in the gross estate. While the matter was pending before the Tax Court the parties entered into negotiations looking to, a compromise. Representatives of the Commissioner conceded that the inclusion of the decedent’s one-half of the Harmon trust property in the gross estate of Harmon could not be sustained, but contended that the Mclllvaine one-half of the Harmon trust property was properly included in the gross estate of Harmon, and offered to accept $27,351.59. The Harmon estate made a counter offer of $13,773.44, which offer was accepted. Thereupon, the parties entered into a stipulation which read:
“It is hereby stipulated and agreed:
“(a) That the Federal estate tax liability in this proceeding is as shown in the following statement:
Net tax liability............. ■ $13,773.44
Tax assessed,and paid prior to the issuance of the deficiency notice: * * * ............. 97.74
Deficiency without taking into account the assessment and payment made subsequent to the issuance of the deficiency notice on March 23, 1943... 13,675.70
Tax assessed and paid:
Original, July 1942, P. 100, L. O. (Paid July 6, 1942)...... .97.74
*307Additional, January 1944, P. 190, L. O. (Paid July 20, 1943) ........... 73,563.54 $73,661.28
Net tax liability.............. 13,773.44
Overpayment of tax (Sec. 912 of the Internal Revenue Code [26 U.S.C.A. § 912])........ $59,887.84
No claim for refund filed.
Deficiency notice mailed March 23, 1943.
Petition filed June 10, 1943.
“(b) That the Court may enter its decision that there is an overpayment in estate tax in the amount of $59,887.84; and may determine as a part of its decision that such amount was paid after the filing of the petition.”
On September 29, 1944, the Tax Court entered its decision, reading as follows:
“Under written stipulation signed by counsel for the parties in the above-entitled proceeding and filed with the Court on September 25, 1944, at Chicago, 111., it is
“Ordered and Decided: that there is an overpayment in estate tax of $59,887.84, which amount was paid after the filing of the petition.”
One-half of the refund was credited to the estate of the decedent and the other one-half to the estate of Mclllvaine.
The Commissioner had excluded from the gross estate of decedent under 26 U.S.C.A. § 812(c) $78,582.35 on account of property of the Harmon trust which came to the decedent. After the instant case reached the Tax Court, the Commissioner in his answer alleged that he had erred in making such exclusion from the gross estate of decedent and sought correction of that alleged error by the Tax Court.
26 U.S.C.A. § 812(c) in part reads: “Property previously taxed. An amount equal to the value of any property (1). forming a part of the gross estate situated in the United States of any person who died within five years prior to the death of the decedent, * * * where such property can be identified as having been received * * * from such prior decedent by gift, bequest, devise, or inheritance, * * *. This deduction shall be allowed only where * * * an estate tax imposed under this chapter or any prior Act of Congress, was finally determined and paid by or on behalf of * * * the estate of such prior decedent, * * * and only in the amount finally determined as the value of such property in determining the value of * * * the gross estate of such prior decedent, and only to the extent that the value of such property is included in the decedent’s gross estate, * * *.”
Harmon died within five years prior to the date of the death of decedent. One-half of the property in the Harmon trust came to the estate of decedent by gift or bequest and could be identified as having been so received. An estate tax imposed under Chapter Three of the Internal Revenue Code was finally determined and paid on-behalf of the estate of Harmon. The Commissioner included the whole of the Harmon trust property in the gross estate of Harmon at a finally determined value of $430,716.
The Harmon estate tax was an entirety-It was a single tax, based on percentages of the value of the entire Harmon net estate. It was not an aggregation of separate taxes upon the separate items, or any one or more of them, which made up the net taxable value of such estate.5
Regulations 105, § 81.2, Estate Tax, Internal Revenue Regulations, in part, provides: “The Federal estate tax is neither a property nor an inheritance tax. It is imposed upon the transfer of the entire net estate and not upon any particular legacy,, devise, or distributive share.”
It will be noted that § 812(c), supra, does not require that an estate tax be assessed and paid on the entire net estate of the prior decedent, as determined by the Commissioner, but only that an estate tax be finally determined and paid by, or- on behalf' of, the estate of the prior decedent. Ordinarily, an estate tax is paid on the entire-net value of the estate, fixed by the Commissioner, but that is never true where the-*308tax paid is the result of a compromise, unless the gross estate is adjusted by exclusions so that the estate tax computed on the entire amount of the net estate will equal the amount of tax agreed upon as a-compromise. I do not think Congress intended to deny exclusion under § 812(c), supra, from the gross estate of the subsequent decedent, where the tax paid by the estate of the prior decedent, as the result of a compromise, was not the full amount determined by the Commissioner, and grant exclusion only in cases where the tax finally determined and paid was the tax on the entire net estate as determined by the Commissioner.
Under the facts presented on this record, the reasons which actuated the Commissioner in accepting the offer of compromise, in my opinion, are not material. The tax paid; was on the entire net estate, and not upon any particular legacy or distributive share which made up the gross estate. It cannot be said that the tax was paid on one-half of the Mclllvaine one-half of the Harmon trust property, since the whole of the Harmon trust property was included by the Commissioner in the gross estate of Harmon and no part thereof was ever excluded therefrom.
Had' the Commissioner so chosen, he could have insisted on a stipulation that the decedent’s one-half and one-half of the Mclllvaine one-half of the Harmon trust property should be excluded from the gross estate of Harmon, and the tax computed accordingly, and thereby arrived at a deficiency identical in amount with the deficiency that was stipulated. However, he elected not to follow that course, but to simply stipulate as a compromise, the amount of the tax liability on the entire net estate.
Where a taxpayer has two courses of procedure open to him to obtain a desired result, one of which, if carried out, results in the incurring of a tax liability, and the other, if carried out, will not result in the accrual of a tax liability, and he elects to follow the former, either because of ignorance or ill advice as to the tax consequences, this1court and other courts have held that he incurs, and must pay, the tax.6 The same rule should apply equally to the United States.
It is my opinion, that with respect to the one-half of the Harmon trust property which came into the estate of the decedent, each of the prerequisites to exclusion under § 812(c), supra, were present, and that the value thereof should have been excluded from the gross estate of decedent.
For the reasons indicated, I would reverse No. 3993 and affirm No. 3994.

. Hereinafter called decedent

. Hereinafter called the Children’s Trust

. Neither the settlors, nor the trustee, had power to amend or alter the trust after the amendment of December 27, 1935.

. Real Property Law, N.Y., Consol.Laws, c. 50, §§ 131, 137; Matter of Walsh, 147 Misc. 281, 264 N.Y.S. 72; Osborn v. Banker’s Trust Co., 168 Misc. 392, 5 N.Y.S.2d 211, 214; In re Brooklyn Trust Co., 163 Misc. 117, 295 N.Y.S. 1007, 1020. See also:
In re Sampson, Law Reports, 1906, 1 Ch. 435, 439; In re Newen, Law Reports, 1894, 2 Ch.Div. 297, 309; In re Skeat’s Settlement, Law Reports, 1889, 42 Ch.Div. 522, 527; Estate of Wilson v. Comm., 13 T.C. 869; Allen v. Nunnally, 5 Cir., 180. F.2d 318, 320.

. Guettel v. United States, 8 Cir., 95 F.2d 229, 230; Cleveland v. Higgins, 2 Cir., 148 F.2d 722, 723; Van Dyke v. Kuhl, 7 Cir., 171 F.2d 187, 189.

. Bonham v. Commissioner of Internal Revenue, 8 Cir., 89 F.2d 725, 728; Curtis v. Commissioner of Internal Revenue, 8 Cir., 89 F.2d 736, 738; United States v. Safety Car Heating Co., 297 U.S. 88, 98, 56 S.Ct. 353, 80 L.Ed. 500; Clemmons v. Commissioner of Internal Revenue, 5 Cir., 54 F.2d 209, 211; Davidson v. Commissioner of Internal Revenue, 305 U.S. 44, 46, 59 S.Ct. 43, 83 L.Ed. 31; Gregory v. Helvering, 293 U.S. 465, 469, 55 S.Ct. 266, 79 L.Ed. 596, 97 A.L.R. 1355; Scott v. Commissioner of Internal Revenue, 8 Cir., 117 F.2d 36, 39; Wichita Term. El. Co. v. Commissioner of Internal Revenue, 10 Cir., 162 F.2d 513, 515.