Court Opinion

ID: 4592803
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:08:45.013704+00
Date Added: 2024-06-11T07:50:55.734239
License: Public Domain

Malcolm D. Champlin, Administrator C. T. A. of the Property of the Estate of Harry C. Orndorff, Petitioner, v. Commissioner of Internal Revenue, Respondent.  Worcester County Trust Company (Successor to Worcester Bank & Trust Company) Trustee and Transferee of Property of Harry C. Orndorff, Petitioner, v. Commissioner of Internal Revenue, RespondentChamplin v. CommissionerDocket Nos. 8273, 8287United States Tax Court6 T.C. 280; 1946 U.S. Tax Ct. LEXIS 287; February 27, 1946, Promulgated *287 Decisions will be entered under Rule 50.  1. In 1928 decedent created a trust under the terms of which the X trust company, as trustee, was empowered to pay over to decedent or his wife during their lifetimes such portion of the principal of the fund as the trustee in its sole discretion should deem necessary for decedent's or his wife's comfort, maintenance, or benefit in such amount as should not be inconsistent with suitable provision for them during the balance of the term of their probable lives.  At decedent's death none of the principal of the fund had been used for that purpose.  Held, the value of the trust is includible in decedent's gross estate under section 811 (c), Internal Revenue Code, as a transfer intended to take effect in possession or enjoyment at or after his death.  Estate of Ida Rosenwasser, 5 T.C. 1043">5 T. C. 1043, followed.2. Liability of trustee and the administrator c. t. a. for the deficiency and interest thereon determined.  Merrill S. June, Esq., for the petitioners.Carl A. Stutsman, Jr., Esq., for the respondent.  Arundell, Judge.  ARUNDELL*280  These cases, consolidated for hearing and disposition, involve an estate tax deficiency in the amount of $ 4,355.17, plus interest at the rate of 6 percent per annum to the appropriate date.Several issues are raised: (1) Is the corpus of a trust created by the decedent on August 4, 1928, under the terms of which the trustee, in *281  his discretion, could, if need arose, invade the principal to provide for the comfort and support of the settlor or his wife during their lifetimes, includible in the settlor's gross estate under section 811 (c) of the Internal Revenue Code; (2) Docket No. 8273 raises the question of the extent of the personal*289  liability, if any, of Malcolm D. Champlin, as administrator c. t. a. of the property of the decedent, for the payment of Federal estate tax; (3) Docket No. 8287 involves specifically the liability of the Worcester County Trust Co., as transferee and trustee of the property of the estate of Harry C. Orndorff, for the payment of Federal estate tax.The facts have been stipulated by the parties and are found as stipulated.FINDINGS OF FACT.The petitioner in Docket No. 8273 is Malcolm D. Champlin, an individual residing at Providence, Rhode Island, who brings the proceeding as administrator c. t. a. of the property of the estate of Harry C. Orndorff, late of Providence, Rhode Island.  As administrator he made a return for Federal estate tax purposes with the collector for the district of Rhode Island at Providence.  No Federal estate tax liability was reflected on the return and no estate tax was paid.  Harry C. Orndorff, hereinafter referred to as the decedent, died August 8, 1942.The petitioner in Docket No. 8287 is the Worcester County Trust Co., a corporation established under the laws of the State of Massachusetts and having its principal place of business at Worcester, Massachusetts, *290  which brings the proceeding as trustee and transferee of property of Harry C. Orndorff, the decedent.In the estate tax return the administrator did not include in the gross estate any part of trust property of an irrevocable trust created by the decedent on August 4, 1928, with the Worcester Bank & Trust Co., now called the Worcester County Trust Co., as trustee.  In filing said return the administrator did make full disclosure of the trust and did furnish the Commissioner with a copy of the trust indenture and full information as to the trust and its value.The value of the trust estate at the time of the decedent's death was $ 69,601.19 and said amount is included in the Commissioner's determination of gross estate. The inclusion of the trust estate in the decedent's gross estate resulted in no basic tax, but in a net estate of $ 37,528.71 for purposes of the additional tax, and results in a deficiency of $ 4,355.17.The Worcester County Trust Co., formerly the Worcester Bank & Trust Co., has at all times since the creation of the trust in 1928 exercised possession and control of the trust estate and the application and disposition of the principal and income thereof have been*291  subject to the terms of the trust indenture. From the date of the establishment *282  of the trust to the date of decedent's death the decedent had no need for any part of the trust corpus and the trustee made no distributions or transfers of any part of the corpus to either decedent or his wife.  Katherine M. Orndorff, named in the trust indenture of 1928, was the wife of decedent at the time the indenture was executed.  Their marriage continued and she survived him as his widow. He left no issue surviving.The following paragraphs of the trust created by the decedent on August 4, 1928, are pertinent to the issue herein:Twelfth: In the event that I or my said wife Katherine M. Orndorff shall be in the opinion of said Trustee, in need, at its discretion, to pay over to me or to her or to use for my or her benefit, in addition to the income, such portions of the principal as it shall deem necessary for my or her comfort and maintenance or for my or her benefit as aforesaid to such extent as shall not be inconsistent with suitable provision for us during the balance of the term of our probable lives.* * * *Twenty-first: To use the discretion herein given liberally and for my*292  best interests and I authorize and empower any court having jurisdiction over this trust at any time to order specifically such exercise of discretion as in the opinion of said court, after notice to said trustee, shall seem best for my permanent welfare and in the carrying out of this trust, it being understood that these trusts are to be construed in all respects except as to termination and except as to the rights of myself and of my wife Katherine M. Orndorff after my death in exactly the same manner as the similar trusts under the fifth clause of the will of my said mother Elizabeth M. Orndorff would have been carried out; it being conceded that I have complied in all respects with the conditions of said will relative to termination thereof in my favor, but that said trustee with my consent and approval deems that it is wise and prudent for my best interests that this fund shall continue to be invested and handled by said trustee in the same manner as previously, except as herein stated but without the right of termination or revocation.Clause fifth of the trust indenture of April 21, 1910, executed by decedent's mother, referred to in decedent's trust indenture, provided for*293  the establishment of a trust for the primary benefit of her son, but also provided for the payment of certain sums to other named individuals for their lives.  The trustee was given broad discretion as to payment of the balance of the income to the son and was likewise authorized to make periodic payments of principal for certain business purposes if in its discretion the circumstances so warranted.  After the death of the son the instrument provided for payments of income, if any, to his widow (other than his present wife) and for the comfort, education, and maintenance of his children until the youngest reached 21 years of age, at which time one-third of the corpus was distributable to them absolutely.  After the death of the widow another one-third became subject to the trust for the benefit of the children.  Out of the remaining third of the balance, specified sums were payable to other named beneficiaries.*283  Subparagraph (i) of clause fifth provided:(i) It is my hope and belief that my said son will soon establish himself as an exemplary citizen and that it will be unnecessary to impose restraints upon his financial affairs, and in that firm belief, I will and direct*294  and empower my said trustee at such time as my said son shall in the judgment of my trustee, definitely establish himself in the community in which he then resides, and, in fact, as an upright citizen of fixed, correct and temperate habits, whether before or after the foregoing trusts have been carried out, to pay over or transfer to my said son from time to time such portions or all of the principal of said fund as it shall deem wise and prudent for the best interests of my said son.Not all of the property included by the Commissioner in the decedent's gross estate passed into the hands of the administrator c. t. a., but the administrator did actually receive property of the decedent of the value of $ 4,614.87.  Of this sum he paid $ 2,183.35 as administrative expenses and the balance of $ 2,431.52 was paid by him either in payment of debts due from decedent or his estate or in distribution to the legatees of the decedent.There is no dispute that if the trust estate is properly includible in decedent's gross estate the deficiency is $ 4,355.17, but, notwithstanding such inclusion, there is a dispute as to the limit of the administrator's (petitioner Malcolm D. Champlin) liability*295  and the limit of his liability depends on whether or not he, as administrator c. t. a., should be held accountable for the administrative expenses of $ 2,183.35 which he paid, or should only be held accountable for the balance of $ 2,431.52 which he used in the payment of debts or in making distributions.The trust was still in existence at the date of decedent's death and is in existence now.  Petitioner Worcester County Trust Co. is in possession of the trust estate, the present value of which is considerably in excess of the deficiency and interest thereon.  The trustee admits liability for the tax and interest if there is a deficiency.OPINION.Since the date of the trust indenture antedates the Joint Resolution of March 3, 1931, the fact that the decedent retained the income of the trust for his life is immaterial. Hassett v. Welch, 303 U.S. 303">303 U.S. 303. This the respondent concedes.  The question is addressed solely to whether or not the corpus of the trust is includible in the decedent's gross estate by reason of the fact that the trust instrument provided that the corpus might be invaded by the trustee for the benefit of the settlor and, hence, *296  that it could not be determined until after his death whether any of the corpus would pass to the named remaindermen.  The applicable statute is section 811 (c) of the Internal Revenue Code.  The gift of the remainder at the death of the decedent was entirely complete and no questions are raised with respect thereto.  It is conceded that the trust was irrevocable.*284 We think that the value of the trust should be included in the decedent's gross estate as a transfer intended to take effect in possession or enjoyment at or after his death by reason of that which he retained for his lifetime. It may be true that his right to any part of the principal of the fund would become legally enforceable only if it became necessary to draw upon that fund for his comfort and support, but the fact that it was contingent is immaterial. Helvering v. Hallock, 309 U.S. 106">309 U.S. 106. The availability of such a fund for that purpose, should the need therefor have arisen, was a very material satisfaction.  To the extent that the use of the principal of the trust would permit, the decedent had an assurance during his lifetime that he and his wife would not lack the means*297  necessary for their comfort and support.  And, until decedent's death or thereafter, the potential charge upon the corpus prevented the beneficiary of that fund from coming into complete enjoyment of it.In Blunt v. Kelly, 131 Fed. (2d) 632; Estate of Margaret P. Gallois, 4 T.C. 840">4 T. C. 840; affd., 152 Fed. (2d) 81; and Estate of Ida Rosenwasser, 5 T.C. 1043">5 T. C. 1043, where the facts and circumstances were much the same as in the instant case, it was pointed out that, although the rights which the settlor reserved in the trust corpus during his lifetime did not amount to a power of revocation, they were nevertheless sufficient to postpone the complete and ultimate devolution of the property until his death and were enough to identify the transfer as one covered by section 811 (c) of the Internal Revenue Code.  Accordingly, we are constrained to hold that the value of the trust is properly includible in decedent's gross estate. The Circuit Court of Appeals for the Second Circuit, in Commissioner v. Irving Trust Co., 147 Fed. (2d) 946, affirming*298 Hugh M. Beugler Trust, 2 T. C. 1052, pointed out the distinction between those cases where the trustee's discretion is governed by an "external standard" which a court could apply in compelling compliance, as in the situation here, and those cases where no such "external standard" was provided.  Daisy Christine Patterson, 36 B. T. A. 407, was based largely upon the rationale of the St. Louis Trust Co. cases, 1 which was later rejected by the Supreme Court in the Hallock case, supra.Petitioner Worcester County Trust Co. is in possession of the trust estate, the present value of which is considerably in excess of the deficiency and interest thereon, and it admits liability for the tax if the deficiency is upheld.  Sec. 827 (b), I. R. C.By an affirmative answer the respondent asserts*299  that petitioner Malcolm D. Champlin, administrator c. t. a. of the property of the decedent, is personally liable as fiduciary for the payment of the estate *285  tax deficiency, plus interest thereon, under the provisions of section 900 (a) of the code and section 3467 of the Revised Statutes.  2 It is stipulated that petitioner Champlin received property of the decedent having a value of $ 4,614.87 and that he paid $ 2,183.35 as administrative expenses and $ 2,431.52 either in payment of debts due from the decedent or his estate or in distribution to the legatees of the decedent. Petitioner Champlin takes the view that in no event should his personal liability for the tax exceed the amount paid out by him upon debts or in distribution.The necessary expenses of administration are properly payable before a debt due the United States.  Hammond v. Carthage Sulphite Pulp & Paper Co., 34 Fed. (2d) 155; Bowes v. United States, 11 Atl. (2d) 720;*300 United Statesv. Eggleston, Fed. Case No. 15,027; United States v. Security-First Nat. Bank, 30 Fed. Supp. 113. See section 827 (a) of the code, which, among other things, provides for the release from the Government's lien of expenses of administration allowed by any court having jurisdiction thereof.  The respondent, who has the burden, has not shown that the payments in question were not approved by the appropriate court.  Thus it follows that the petitioner is not personally liable for the sum of $ 2,183.35 paid out for expenses of administration.To the extent of the payment of debts or distributions to legatees, the petitioner should be held personally liable for the deficiency.  3 See Helen Dean Wright, 28 B. T. A. 543. We assume, however, that, since the deficiency results from the inclusion of the value of the trust property in decedent's gross estate and the trustee admits liability for the tax if the deficiency is upheld, the respondent will collect the deficiency and interest from said trustee.*301 Decisions will be entered under Rule 50.  Footnotes1. Helvering v. St. Louis Trust Co., 296 U.S. 39">296 U.S. 39; Becker v. St. Louis Trust Co., 296 U.S. 48">296 U.S. 48↩.2. U. S. C., Title 31, ch. 6, sec. 192.↩3. Sec. 3467 of the Revised Statutes, and Treasury Regulations 105↩, sec. 81.99.