Court Opinion

ID: 4588899
Source: CourtListenerOpinion
Date Created: 2020-11-20 18:43:03.862645+00
Date Added: 2024-06-11T07:50:09.819408
License: Public Domain

NORTHERN TRUST CO., EXECUTOR OF THE LAST WILL AND TESTAMENT OF ELLEN L. VAN SCHAICK, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Northern Trust Co. v. CommissionerDocket No. 7127.United States Board of Tax Appeals9 B.T.A. 96; 1927 BTA LEXIS 2673; November 14, 1927, Promulgated *2673  1.  An irrevocable trust to accumulate the income from property until grantor's death or for 21 years and then to distribute to grantor's descendants, held not "intended to take effect in possession or enjoyment at or after death" within section 402(c) Revenue Act of 1921.  Shukert v. Allen,273 U.S. 545">273 U.S. 545. 2.  In view of Nichols v. Collidge,274 U.S. 531">274 U.S. 531, the provision of section 402(c), Revenue Act of 1921, which includes within the gross estate the value of property which, prior to the passage of the Act, was transferred in trust to take effect in possession or enjoyment at or after death, is valid.  Frederic Ullmann, Esq., for the petitioner.  J. F. Greaney, Esq., for the respondent.  STERNHAGEN *96  Deficiency in estate tax of $34,355.09.  The issue is whether certain transfers of property were within the gross estate as intended to take effect in possession or enjoyment at or after death.  *97  FINDINGS OF FACT.  Ellen L. Van Schaick, the decedent, died testate on April 11, 1923, at the age of 77 years, a resident of Chicago, leaving a last will and testament and two codicils thereto, *2674  which were admitted to probate by the probate court of Cook County on April 16, 1923, on which date letters testamentary were issued to the Northern Trust Co. as executor.  By this will the testatrix devised and bequeathed her entire estate, which consisted of both real and personal property, to her four children, Harrison Ludington Van Schaick, Ellen Van Schaick, Gerard Van Schaick, and Arthur P. Van Schaick, equally.  Ellen Van Schaick, the daughter, died prior to the death of the decedent, and the share which would have gone to her went, in accordance with the terms of the will, to the surviving children.  The value of the property passing under the will was at the date of the death $520,687.18.  The deductions allowable under the Revenue Act of 1921, and the specific exemption of $50,000, totaled $105,954.61.  During her lifetime the decedent had executed and delivered four deeds of trust.  The first of these deeds of trust was executed and delivered on April 2, 1912, and conveyed to the Northern Trust Co., as trustee, certain real estate in the City of Chicago, the value of which at the date of the death was $127,272.72.  This deed provided that the trustee should pay the*2675  entire net income to the grantor for life; that after her death the entire net income should be distributed among her four children, share and share alike, for life; that upon the death of any one of the children leaving lawful issue, the share of the income which would have gone to that child, if living, should be paid to his or her lawful issue, per stirpes, until the period of distribution; and that in case any of the children should die without lawful issue, or leaving lawful issue and all such issue should subsequently die, before the time of distribution, the share of the income to which such child would have been entitled, if living, should go and be paid to the survivor or survivors of the children and their issue.  Final distribution of the principal was to be made among the grantor's grandchildren and the children of her step-daughter upon the death of the grantor's children and step-daughter, or when the youngest of the grandchildren and the children of the step-daughter should attain the age of 21 years, whichever should happen last.  It was also provided that if any of the grandchildren or the children of the step-daughter died before the period of distribution, *2676  leaving lawful issue, the issue should take, but if no issue, then that share should go to the surviving grandchildren and the children of the step-daughter, and there was a provision as to when final distribution *98  should be made in case all the grandchildren and the children of the step-daughter should die under 21, one or more leaving issue.  It was further provided that in case of total failure of issue of the grantor and her step-daughter at or before the time fixed for final distribution, the trust estate should be transferred, assigned and conveyed to Bishop Charles Palmerston Anderson of the Protestant Episcopal Church in the Diocese of Chicago, and his successors in office, a corporation sole, in trust for charities for the benefit of children.  It was further provided that the trust should be known as the Anthony Gerard Van Schaick Trust.  Anthony Gerard Van Schaick was the deceased husband of the grantor.  The second deed of trust was executed and delivered on February 9, 1917.  This deed also conveyed to the Northern Trust Co., as trustee, certain other real estate to be held by it in trust for the identical uses and purposes which are expressed in the deed of*2677  trust of April 2, 1912.  The value at the date of the death of the real estate conveyed by this second deed, the deed of February 9, 1917, was $99,615.38.  The third deed of trust was executed and delivered on October 7, 1919.  This deed transferred certain shares of stock in two corporations to the Northern Trust Co. and to Arthur P. Van Schaick and Ellen Van Schaick, as trustees, to hold upon the trusts therein specified, which are stated below.  The deed provided that the trustees should continue to hold the stock and collect the dividends, and that all of these dividends whenever they might be paid should be treated as principal of the trust estate.  After enumerating the powers of the trustees in the administration of the trust, it was provided that during the lifetime of the grantor the entire net income from the trust estate should be accumulated and added to the principal and form a permanent portion of such principal; provided, however, that such accumulations should not continue for more than 21 years, and in case the grantor should still be living at the end of 21 years then thereafter the income should be distributed in the same way that it would be distributed in case*2678  she were not living; that after the death of the grantor the entire net income from the trust estate, nor treating as income any dividends or distributions from the stocks originally deposited with the trustees, should be paid over, divided, and distributed in convenient installments among and between the grantor's four children, Harrison Ludington Van Schaick, Ellen Van Schaick, Gerard Van Schaick, and Arthur Patton Van Schaick, share and share alike, for and during the terms of their natural lives; that upon the death of any one of the children leaving lawful issue, the share of the net income which would have gone to such child, if living, should be paid to his or her lawful issue, per stirpes, until the period of distribution of *99  the principal; that should any of the children die without lawful issue, or in case of his or her death leaving lawful issue if all such issue should subsequently die before the time of distribution, the share or shares of the net income to which he, she or they would have been entitled, if living, should go and be paid to the survivor or survivors of the grantor's children and their lawful issue in the same manner as the rest of the net*2679  income.  It was provided that upon the death of Frances Eliza Clinch, who was the step-daughter of the grantor, and upon the death of all of the grantor's children, or when the youngest child of the step-daughter and of the grantor's children should attain the age of 21 years, whichever event should last happen, all of the trust estate then remaining in the hands of the trustees should be divided equally among the children of the step-daughter and of the grantor's children, being the grandchildren of the grantor's husband, Anthony Gerard Van Schaick; that in case any of these distributees should die leaving lawful issue surviving, before the period of distribution, the share of principal of such child should go to such issue per stirpes, and in case any of the distributees, that is, the grandchildren of Anthony Gerard Van Schaick, the grantor's husband, should die without lawful issue, or leaving issue and such issue should all die, prior to the period of distribution, the share or shares of the principal to which he, she or they would have been entitled, if living, should go and be paid to the survivor or survivors of the said grandchildren, and their issue, in the same way*2680  and proportions as the rest of the principal; and that if all of the grandchildren of Anthony Gerard Van Schaick, that is the children of the grantor's step-daughter and the children of her own children, should die under 21 years, and one or more of them should leave issue surviving, the provision for distribution of the principal upon the arrival at the age of 21 years of the youngest of them should be taken to be the time when the youngest so dying, leaving issue, would have attained the age of 21 years, if living, provided that all such issue should not die prior to that time, and so with each succeeding youngest child so dying under 21 years of age leaving issue.  It was further provided that in case of the total failure of issue of the grantor and of her step-daughter at or before the time fixed for distribution of the principal, the trust estate should be transferred, assigned and conveyed by the trustees to Bishop Charles Palmerston Anderson of the Protestant Episcopal Church in the Diocese of Chicago, and his successors in office, a corporation sole, in trust for charities for the benefit of children.  The trustees covenanted and agreed with the grantor and with the beneficiaries*2681  therein mentioned that they would stand seized and *100  possessed of the trust estate and of all of the income, profits and avails thereof which should come into their hands upon the trusts therein expressed and none other.  It was further provided that the trust should be known as the Ellen Ludington Van Schaick Trust.  The value of the estate held by the trustees under this deed was at the date of the death of the grantor the sum of $272,424.75.  Between the delivery of this deed and the death of the grantor, her daughter, Ellen Van Schaick, died, on April 6, 1921, after which date the remaining two trustees, the Northern Trust Co. and Arthur P. Van Schaick, acted as trustees pursuant to provisions of the deed that in case of the death of either of the individual trustees then the survivor together with the Northern Trust Co. should act as joint trustees.  The fourth deed of trust was executed and delivered on May 6, 1921.  This deed conveyed certain real estate to the Northern Trust Co. and Arthur P. Van Schaick, as trustees, they being the surviving trustees under the deed of October 7, 1919, which real estate was by the terms of the deed conveying the same to be*2682  held by them upon the trusts and for the uses and purposes set forth in the deed of October 7, 1919.  This deed was not made in contemplation of death.  The value of the estate held by the trustees under this last deed was at the date of the grantor's death $35,000.  Upon the delivery of each of these deeds the property conveyed and transferred thereby was immediately turned over and delivered to the grantees therein as trustees, who at once entered upon the performance of the trusts and performed the same in accordance with the terms of the respective deeds.  The net income of the property transferred by the first two deeds was paid to the grantor during her life, and the income of the property transferred by the last two deeds was accumulated, all in accordance with the terms of the instruments.  At the time of the decedent's death her only heirs at law and next of kin were her three sons, Harrison L. Van Schaick, Gerard Van Schaick, and Arthur P. Van Schaick, all of whom were on the said date of legal age.  At that time her son, Harrison L. Van Schaick, then 40 years of age, was married and had one daughter; her son Gerard Van Schaick, then 43 years of age, was married and had*2683  two sons; and her son Arthur P. Van Schaick, then 41 years of age, was married and had two daughters and one son.  At the time of the death, Frances Eliza, Clinch, of Chicago, Ill., wife of George Owens Clinch, and daughter by a former marriage of Anthony Gerard Van Schaick, the deceased husband of the decedent, was living and had one daughter.  Eleanor Frances Clinch.  The decedent's daughter, Ellen Van Schaick, had predeceased her on April 6, 1921.  *101  The respondent included in the gross estate the value of all the property held by the trustees under these four instruments at the date of the death, determining the gross estate to be $1,055,000.03.  The respondent allowed the deductions of $105,954.61, as above stated, making the net estate $949,045.42, upon which a total tax of $47,423.63 was computed.  Of this amount $13,088.54 was paid, leaving unpaid the amount of $34,335.09, the amount of the deficiency here involved.  OPINION.  STERNHAGEN: The decedent died on April 11, 1923, and the Revenue Act of 1921, then in effect, imposed an estate tax upon the transfer of her net estate above $50,000.  The estate made its return and paid tax of $13,088.54.  Thereafter*2684  the respondent required the inclusion within the gross estate of the value at the date of death of the property which had theretofore been conveyed in trust by the four instruments summarized in the findings, consisting of various parcels of real estate and certain shares of stock, thus increasing the net estate and determining a deficiency in tax.  The petitioner seeks here a redetermination that there is no deficiency because the value of the trust property is not properly part of the gross estate under the statute and may not be taxed as such under the Constitution.  The Revenue Act of 1921, Title IV, imposed an estate tax, section 401, effective upon its passage, section 1401, 1 in lieu of a like tax in the Revenue Act of 1918, which was repealed, section 1400. 2 The earlier estate taxes were likewise repealed by the Revenue Act of 1918, section 1400, 3 so that at the time of the death of the present decedent in 1923, the Revenue Act of 1921 alone was in force, and this was effective only from its passage on November 23, 1921.  It is necessary, therefore, to consider only the provisions of this statute in *102  order to consider whether a tax has been imposed, *2685 . With omissions of unnecessary matter, the pertinent provisions are: SEC. 401.  That, in lieu of the tax imposed by Title IV of the Revenue Act of 1918, a tax equal to the sum of the following percentages of the value of the net estate (determined as provided in section 403) is hereby imposed upon the transfer of the net estate of every decedent dying after the passage of this Act, * * *.  SEC. 402.  That 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 - *2686  * * * (c) To the extent of any interest therein of which the decedent has at any time made a transfer, or with respect to which he has at any time created a trust, in contemplation of or intended to take effect in possession or enjoyment at or after his death (whether such transfer or trust is made or created before or after the passage of this Act), except in case of a bone fide sale for a fair consideration in money or money's worth.  * * * Section 403 prescribes the deductions to be made from the gross estate to arrive at the value of the taxable net estate.  The Commissioner has held that the property covered by the four trusts was the subject of transfers or trusts "intended to take effect in possession or enjoyment at or after [her] death," and that therefore its value at the date of death was within the gross estate.  Respondent's counsel in support of this determination makes no distinction among the four transfers.  But clearly, if the statute applies at all, it must be for different reasons as to the two later transfers from those applicable to the two earlier.  The 1912 transfer reserves to decedent the income for life, as did the 1917 transfer, which merely*2687  increased the res. The 1919 and 1921 transfers reserved nothing to the decedent but required the accumulation of the income for her descendants until she died or for 21 years if she did not die before then.  In all trusts the corpus was irrevocably transferred from the decedent.  We consider first the 1919 transfer.  If it were not for the provision that the accumulation should cease and the distribution be made at decedent's death within 21 years, the instrument would be like that in ; 6 Am.Fed. Tax Rep. 6550, and the property would not be within the statutory gross estate.  In that case the accumulation was to carry on for 30 years, irrespective of the grantor's death.  The instrument was made in 1921, less than five months before the testator's death.  The Supreme Court, after finding that the transfer was immediate and vested the interest in the beneficiaries at the time of execution, said: * * * But it seems to us tolerably plain, that when the grantor parts with all his interest in the property to other persons in trust, with no thought of avoiding taxes, the fact that the income vested in the beneficiaries*2688  was to be *103  accumulated for them instead of being handed to them to spend, does not make the trust one intended to take effect in possession or enjoyment at or after the grantor's death.  Is the present transfer brought within the statute by the additional fact that the period of accumulation was limited by the creator's death if within 21 years?  The transfer was no less complete; the interests of the trustee and of the beneficiaries were no less vested; the possession or enjoyment had as effectually passed from the decedent; there was, non constat, no more thought of avoiding taxes.  There was the possibility that the distribution would be made before death if the creator of the trust should live more than 21 years, unless it is to be said as law that a person of 73 may not entertain that hope.  There is here no reason to believe that in fact the testatrix expected to die earlier.  The fact of the testatrix's death served only as an alternative limitation of the time of accumulation, the other alternative being the end of the 21 years.  The transfer had already become completely effective, so far as it affected her.  Her disposition was complete and beyond recall. *2689  If she had transferred to A until her own death with remainder to B, could the property be included within her estate, merely because B's actual possession was postponed?  It seems clear that unless there were some other evidence that the transfer was testamentary it would be treated for all purposes as complete when made and beyond the reach of estate taxes.  It is no less so here.  The intervention of an accumulating trust makes the transfer no less complete.  The trustee takes possession immediately, accumulates the income for the period until testatrix's death or for 21 years, and then distributes the income periodically throughout the lives of the beneficiaries.  It has been held by the Commissioner that thus the value at death of the entire trust res transferred four years earlier at an undisclosed value was within section 402(c).  This determination is reversed, and the property transferred in 1919 and 1921 is held not to be within the gross estate.  We take up then, the earlier transfer made in 1912 and that made to the same trust in 1917.  The significant feature of these transfers, the one which it is said by the Government brings the property within the gross estate, *2690  is that the decedent reserved to herself the right to receive the income during her life, and directed that thereafter it should go to her children during their lives.  The final distribution of the trust property was to be made to the grandchildren, but not earlier than the death of the last surviving child or the twenty-first birthday of the youngest living grandchild.  Like the transfers of 1919 and 1921, there is no evidence whatever that these transfers of 1912 and 1917 were actuated by a purpose to avoid taxes.  *104  The earlier was made when no Federal death tax was imposed.  The second was made while the tax of 1916 (repealed as above stated by the Act of 1918) was in force.  It does not appear what was the value of the property when transferred, the value at the time of death being the only figure regarded by the Government as significant.  The case seems to depend upon the validity under the Constitution of the statute, for as said by Judge Hand in , the possession or enjoyment is different from the legal vesting, and can not in any event take effect until the grantor's death.  Unlike the transfer of 1919 and unlike*2691  that of , there is no chance that a fixed event may bring about the possession or enjoyment of any part of the property, whether of the succeeding life interest of the children or grandchildren or of the remainder interest of the surviving grandchildren, prior to the death of the grantor.  The prototype of the provision in question as it appeared in the Revenue Act of 1918 was considered by the Supreme Court in ; 6 Am.Fed. Tax Rep. 6758, and in so far as by its retroactive effect it attempted to bring within the gross estate property which had been transferred in 1907 it was held to be too capricious an exercise of the taxing power.  And in , the Circuit Court of Appeals, Second Circuit, held the same.  In both those cases, the grantor had disposed of the income as well as the remainder, while here she kept the income for her life.  The Supreme Court, so far as can be gathered from the opinion, did not look upon this as controlling; for aside from the statement of the fact, it nowhere enters into the discussion.  The opinion seems*2692  rather to condemn in toto the attempt to reach back and bring into the gross estate and property which had by such a trust been transferred before the passage of the Act.  The concluding sentences are: * * * And we must conclude that section 402(c) of the statute here under consideration, in so far as it requires that there shall be included in the gross estate the value of property transferred by a decedent prior to its passage merely because the conveyance was intended to take effect in possession or enjoyment at or after his death, is arbitrary, capricious and amounts to confiscation.  Whether or how far the challenged provision is valid in respect of transfers made subsequent to the enactment, we need not now consider.  In view of the repeated and well established rule that constitutional questions will be avoided wherever possible, and the decision of the District Court that the transfers in question were within section 402(c), it must be assumed that the Supreme Court so treated them.  Hence it is unnecessary for us to consider here whether the transfers of 1912 and 1917 were within the statute, for even assuming that they were, they could only be reached by the retroactive*2693  clause of the provision.  *105  We see no escape, after the Supreme Court's decision as to the 1918 Act, from the conclusion that the 1921 Act is subject to the same infirmity, and we must therefore reverse the Commissioner.  See , and . The property transferred by the four instruments should be excluded from the gross estate.  Judgment will be entered on 15 days' notice, under Rule 50.Considered by ARUNDELL.  Footnotes1. SEC. 1404.  That except as otherwise provided, this Act shall take effect upon its passage.  ↩2. SEC. 1400. (a) That the following parts of the Revenue Act of 1918 are repealed, to take effect (except as otherwise provided in this Act) on January 1, 1922, subject to the limitations provided in subdivision (b): * * * Title IV (called "Estate Tax") on the passage of this Act; * * *.  ↩3. SEC. 1400. (a) That the following parts of Acts are hereby repealed, subject to the limitations provided in subdivision (b): (1) The following titles of the Revenue Act of 1916: * * * Title II (called "Estate Tax"); * * * (2) The following parts of the Act entitled "An Act to provide increased revenue to defray the expenses of the increased appropriations for the Army and Navy and the extensions of fortifications, and for other purposes," approved March 3, 1917: Title III (called "Estate Tax"); * * * (3) The following titles of the Revenue Act of 1917: * * * Title IX (called "War Estate Tax"); * * *.  16487 degrees - 29 - 10 ↩