Court Opinion

ID: 4590187
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:03:08.575881+00
Date Added: 2024-06-11T07:50:25.770692
License: Public Domain

CORNELIA V. W. KELLOGG, EXECUTRIX OF THE ESTATE OF FREDERIC R. KELLOGG, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Kellogg v. CommissionerDocket No. 89143.United States Board of Tax Appeals40 B.T.A. 916; 1939 BTA LEXIS 779; November 22, 1939, Promulgated *779  The grantor of an irrevocable trust directed that the income from the corpus be paid to him during his life and then to his wife during her life; that after their death the estate be apportioned and held for the benefit of their children and distributed to them under certain conditions; that upon the death of each child, after the death of his parents and before he had become entitled to receive his portion of the estate, his share was to pass to his spouse, children, appointees by will, or next of kin; that if all the children of the grantor and his wife should predecease them, leaving no spouse or issue, all of the trust corpus was to pass to the grantor's next of kin.  Held, that the corpus of such a trust is not includible in the grantor's gross estate.  C. M. Tappen, Esq., for the petitioner.  Allen T. Akin, Esq., for the respondent.  VAN FOSSAN *916  This proceeding was brought to redetermine a deficiency of $138,761.74 in the estate tax of Frederic R. Kellogg, deceased.  A deduction of $67,180.61 is claimed as a credit for state taxes paid, leaving in controversy the sum of $71,581.13.  The sole issue, as limited by the respondent's*780  amended answer, is whether or not the transfers in trust made by the decedent in 1919 and subsequent years are taxable as intended to take effect in possession or enjoyment at or after the decedent's death, under the provisions of section 302(c) of the Revenue Act of 1926 as amended by section 803 of the Revenue Act of 1932.  The facts were stipulated substantially as follows: The petitioner is a resident of Morristown, New Jersey, and is sole executrix of the estate of Frederic R. Kellogg, deceased, who died August 18, 1935, a resident of Morristown, New Jersey.  Letters testamentary were issued to the petitioner as executrix on August 29, 1935, by the Surrogate's Court, Morris County, New Jersey, and have not been revoked.  On December 29, 1919, Frederic R. Kellogg, as grantor, executed an irrevocable trust agreement, with himself and Cornelia V. W. Kellogg as grantees.  The corpus of the trust consisted of 1,300 shares of the common stock of the Pan American Petroleum & Transport Co. and "such other and further securities, assets and property as the grantor may from time to time assign to the trustees." Capital gains and losses were to be charged to the corpus.  *917 *781  The pertinent portions of clauses IV and V of the agreement are as follows: IV.  The Trustees are directed to receive all the net income as herein defined from all of the securities now or hereafter held in trust hereunder, and to dispose of the same as follows: (a) All such income shall be paid over as and when received to the said Grantor during his life.  (b) Upon the death of the Grantor prior to the death of the said Cornelia V. W. Kellogg, all of the said income shall become payable and be paid as and when received to the said Cornelia V. W. Kellogg during her life.  (c) Upon the death of the survivor of the said Grantor and the said Cornelia V. W. Kellogg, all of the assets then held in trust hereunder shall be divided, or if for convenience in administration they be kept without physical subdivision they shall nevertheless be deemed to be divided into as many parts of equal value as there are children of the Grantor and of the said Cornelia V. W. Kellogg now alive and then surviving, together with one equal part in respect of each of the said children who may theretofore have died leaving husband, wife and/or issue him or her surviving.  One of the said parts shall*782  be held in trust upon the terms hereof for each of the said surviving children who may be within the ages hereinafter specified, and each of the said trusts shall continue as to one-half of the corpus of the property held in trust until the beneficiary thereof shall reach the age of twenty-seven (27) years if he or she shall live so long, and as to the remaining one-half, until the beneficiary shall reach the age of thirty-two (32) years, if he or she shall live so long.  If at the time when any such trust would otherwise become operative, the beneficiary thereof shall have already reached the age of twenty-seven (27) or thirty-two (32) years, as the case may be, such trust shall not be operative as to the part of the corpus of the property which such beneficiary is entitled to receive absolutely pursuant to the foregoing provisions.  Before any beneficiary reaches the age of twenty-one (21) years, all the income from the trust for his or her benefit shall be applied to his or her use by the Trustees, but after reaching the age of twenty-one (21) years, all income shall be paid over directly to such beneficiary.  * * * V.  Upon the death of any of the said children of the Grantor*783  and the said Cornelia V. W. Kellogg, after the death of the survivor of the said Grantor and the said Cornelia V. W. Kellogg, and prior to the expiration of the period of the trust created for such child hereunder, the trust shall terminate as to that part of the corpus of the trust estate then held in trust for such beneficiary and the Trustees shall set apart such part of the said trust estate in the form of securities which in their judgment (which shall be conclusive) shall be of the proper value.  Such part shall pass absolutely - 1.  To the wife, husband, and/or issue of such child, or one or more of the foregoing persons if surviving said Grantor and said Cornelia V. W. Kellogg, in such shares as such child, if of testamentary capacity, may appoint by will.  2.  Any portion or interest not thus validly disposed of by will shall pass to the husband, wife and next of kin of such child in the shares provided by the laws of New Jersey relating to disposition of personal property in case of intestacy.  *918  In making any division hereunder, no part of the trust estate need be sold or transmuted into cash unless necessary in the judgment of the Trustees, and any division*784  of the trust estate shall be made in its then existing form of investment so far as practicable.  If all of the said children of the Grantor and said Cornelia V. W. Kellogg shall predecease their said parents leaving no wife, husband and/or issue surviving said Grantor and said Cornelia V. W. Kellogg, all of the property held in trust shall, at the death of the survivor of the said Grantor and Cornelia V. W. Kellogg pass absolutely to the then surviving next of kin of the Grantor in the shares provided by the laws of New Jersey relating to the disposition of personal property in case of intestacy.  On March 2, 1926, 600 shares of Columbia Gas & Electric Co. common stock were transferred to the trust.  All the property transferred by the decedent to the trust was transferred on or before October 1, 1929, and no transfers were made by decedent to the trust after October 1, 1929.  The corpus of the trust possessed a value as of the date of the decedent's death of $329,958.87.  The decedent's wife, Cornelia V. W. Kellogg, and his children, Frederic B. Kellogg, Edmund H. Kellogg, Cornelia R. Kellogg, and Mary Darcy Kellogg Thomas, were all living on December 29, 1919, the date of*785  the creation of the trust, and all survived his death on August 18, 1935.  The decedent's grandchild, Landon Thomas, 3rd, and his son-in-law, Landon Thomas, 2nd, both survived him.  All of the above persons are beneficiaries under the trust.  None of the transfers to the trust was made in contemplation of death.  OPINION.  VAN FOSSAN: The issue here presented is whether or not the transfers in trust were intended to take effect in possession or enjoyment at or after the grantor's death and thus the trust corpus should be included as a part of the taxable estate.  The respondent's theory is that by the terms of the trust the decedent retained a reversion in the trust corpus, while the petitioner contends that he reserved no power or interest other than income for life.  Even if the trust contains a possibility of reverter running to the next of kin or heirs of the decedent, the petitioner asserts that such a possibility is so remote as to render the corpus not taxable.  Being confronted with , the respondent has abandoned his original ground, as stated in his notice of deficiency, that the value of the trust should be included*786  in the gross estate of the decedent because its income was to be distributed to him, as grantor, during his lifetime and bases his contention solely on that portion of section 302(c) of the Revenue Act of 1926, *919  as amended by section 803 of the Revenue Act of 1932, which relates to the decedent's intention to make the transfer take effect in possession or enjoyment at or after his death.  The respondent relies on . In that familiar case the grantor, by deed, conveyed land to his wife to hold during her natural life and reserved a remainder to himself if his wife predeceased him.  The Court there held that only a life estate was vested and whether or not the remainder would ever become vested in the grantee depended upon the condition precedent that the death of the grantor happened before that of the grantee.  In , however, the Court distinguished the Klein case under facts more nearly resembling those in the case at bar.  In the St. Louis Union Trust Co. case the decedent provided that the income from the trust should be paid to his*787  daughter for life, with the remainder to certain designated persons.  The trustee was given discretionary power to terminate the trust whenever he might deem it wise to do so, whereupon the estate was to revert to the grantor.  If the daughter should predecease the grantor the trust was to terminate and the trust estate was to be transferrred to the grantor, to be his absolutely.  The Court there said: The case of , which is strongly relied upon by the Government, does not support its position.  There the grantor, 15 months prior to his wife's death, conveyed to his wife by deed a life estate in certain lands.  But in the event that she survived the grantor "and in that case only" she was to take the lands in fee simple.  The effect of this deed, we held, was that only a life estate was vested, the remainder being retained by the grantor; and whether that should ever become vested in the grantee depended upon the condition precedent that the grantor die during the life of the grantee.  The grantor having died first, his death clearly effected a transmission of the larger estate to the grantee.  But here the grantor parted with*788  the title and all beneficial interest in the property, retaining no right with respect to it which would pass to anyone as a result of his death.  Unlike the Klein case, where the death was the generating source of the title, here, as the court below said, the trust instrument and not the death was the generating source.  The death did not transmit the possibility, but destroyed it.  So here, the decedent transferred the title to the trust corpus and retained only a right to its income, terminating at his death.  That reservation does not render the trust corpus taxable, . He then provided that after his death the current income should be paid to his wife during her life.  Upon her death he directed that the estate should be divided among their children under certain conditions immaterial to this discussion.  If any child should die his share was to go to his heirs or to the appointees in his will or, in the absence of such beneficiaries, to his next of kin.  However, if all of the grantor's children should predecease him and *920  his wife, leaving no spouse or issue surviving the grantor and his wife, then and then only*789  was the trust corpus to pass to the grantor's next of kin.  Thus the grantor retained no right of reversion whatever in himself and only in a very remote contingency would the estate go to his next of kin.  But that possible transmission to the next of kin was dependent not upon the grantor's death, but upon the death of various intermediary persons who were all living at the date of the grantor's death.  After the decedent's death the acquisition of the corpus by either his children and their descendants or by his next of kin was no more definite and certain than before that event.  Hence, the decedent's death had no effect on any specified interest of his children or on any potential interest of his next of kin in the property sought to be taxed as a part of his estate.  See . The respondent relies on certain decisions of the courts of New Jersey to establish the fact that the remainders given to the decedent's children were not vested.  The cases he cites are all distinguishable on fact and do not support his position.  There is no controversy here with respect to what individuals may take under the trust instrument, *790  as to the character of their share or the conditions controlling their devolution.  We are concerned only with the incidents of tax from the viewpoint of the Federal taxing statutes.  Under these circumstances, the decisions of the Federal courts and not of the local courts must govern.  . We hold that the corpus of the trust was not properly included in decedent's gross estate.  Decision will be entered under Rule 50.