1938 BTA LEXIS 917">*917 1. Decedent, one of three creators of an irrevocable trust indenture whereby it was provided that the property was to revert to the creators in the event the beneficiary predeceased them, died before the beneficiary. Held, following Helvering v. St. Louis Union Trust Co.,296 U.S. 39">296 U.S. 39, decedent had a mere possibility of reverter and that the proportionate share of the trust corpus was not taxable as a "transfer intended to take effect in possession or enjoyment at or after death."
2. Decedent promised to pay $1,000 of a $2,400 scholarship fund if her sister agreed to pay the balance of $1,400. The sister agreed, decedent died before payment, and her executrices paid the $1,000. Held, that the payment of $1,000 should be allowed as a deduction from the gross estate.
3. Petitioners, the executrices of the estate, paid interest accrued since the date of decedent's death on a deficiency in decedent's 1931 income tax which respondent denied as a deduction. Held, that the payment of interest should not be permitted as a deduction, either as a debt or as an administration expense.
38 B.T.A. 51">*52 This proceeding was brought for the redetermination of an estate tax deficiency in the amount of $1,345.48.
The issues are (1) whether there should be included in decedent's gross estate an amount representing decedent's remainder interest in one-third of the principal of a trust fund created by the decedent and her two sisters on November 12, 1927; (2) whether there should be allowed as a deduction from the gross estate the sum of $1,000 paid to the Bonita School by petitioners pursuant to a promise made by decedent; and (3) whether there should be allowed, as a deduction from the gross estate, interest accrued since the date of decedent's death on a deficiency in her 1931 income tax, which interest was paid by petitioners.
FINDINGS OF FACT.
The stipulated facts are substantially as follows:
Marion Scofield, the decedent herein, died on May 20, 1933, a resident of the State of New York. Her last will and testament, dated February 1, 1927, was duly admitted to probate on June 10, 1933, and petitioners herein are the duly qualified executrices of her estate. Petitioners and the decedent were sisters.
1938 BTA LEXIS 917">*919 Another sister, Helen Scofield Thayer, died on May 23, 1926, leaving her husband, Gordon Russell Thayer, surviving her. Shortly thereafter the decedent and petitioners considered the creation of a trust fund in an amount deemed sufficient to permit a sum not exceeding $5,000 to be paid annually from the net income thereof to Gordon Russell Thayer during his life.
Thereupon the decedent and petitioners entered into an irrevocable trust indenture dated November 12, 1927, with the Bankers Trust Co. of New York whereby each transferred to the trustee $33,333.33, or one-third of $100,000, which was the amount determined upon as adequate to bring in the desired annual return of a sum not exceeding $5,000. The entire sum was paid to the trustee, subject to the terms of the trust indenture, which provided in part as follows:
NOW, THEREFORE, THIS INDENTURE WITNESSETH: That in consideration of the premises, the mutual covenants herein contained, and of other good and valuable considerations, and of the sum of One Dollar ($1.00) to each of them in hand paid by the Trustee, at or before the ensealing and delivery of these presents, the receipt whereof is hereby acknowledged, the Donors1938 BTA LEXIS 917">*920 have assigned, 38 B.T.A. 51">*53 transferred, paid over, and delivered, and by these presents do assign, transfer, pay over and deliver unto the Trustee, its successors and assigns, the sum of One Hundred Thousand Dollars ($100,000), (each of the Donors having contributed one-third (1/3) thereof), to have and to hold the same IN TRUST NEVERTHELESS, for the upon the following uses and purposes, and subject to the terms, conditions, powers, and agreements hereinafter set forth.
FIRST: To receive, hold, manage, sell, invest, and reinvest the same and every part thereof, in the manner hereinafter specified, and to collect, recover, and receive the rents, issues, interest, and income thereof (hereinafter called "income"), and after deducting the commissions of the Trustee, as hereinafter provided, and the proper and necessary expenses in connection with the administration of the Trust, to pay the same up to but not exceeding the sum of Five Thousand Dollars ($5,000.) per annum, (in quarterly instalments of equal or substantially equal amounts to Gordon Russell Thayer, of Paris, France, husband of the late Helen Scofield Thayer, sister of the Donors, during his life, and during such period, 1938 BTA LEXIS 917">*921 to pay any excess of said net income over and above the said sum of Five Thousand Dollars ($5,000.) per annum, annually, in equal shares per stirpes, to each Donor living at the time of said payment, and to the issue then living, if any, of any deceased donor.
Upon the death of said Gordon Russell Thayer, the principal of said Trust Fund and any and all accrued and unpaid income thereof shall be divided into three equal parts and one of such parts assigned, transferred, paid over and delivered, by the said Trustee, to each Donor; or if any Donor shall not be living at the time of such distribution, then the share of such Donor shall be assigned, transferred, paid over and delivered by the said Trustee to the issue then living of such Donor, per stirpes and not per capita; or if there be no issue then living of such Donor, then the share that such Donor would have received if living, shall be distributed according to the Statute of Distribution of the State of New York as of the date of such distribution as if such Donor had then died the owner of said share, it being the intent hereof that each Donor has and hereafter shall have a separate interest in one-third (1/3) of the1938 BTA LEXIS 917">*922 principal and income of the said trust fund, free of any interest in or control over the same by the other or either of the other Donors.
At the time of the execution of the trust agreement and of the transfer by the decedent of her one-third share of the $100,000, the decedent was about 60 years old. At the time of her death the decedent was 67 years of age and Gordon Russell Thayer, the life beneficiary of the trust, was 54 years of age.
The trust agreement and the transfer thereto by the decedent were not made by her in contemplation of death.
At the time of the making of the trust agreement it was contemplated by the donors, including the decedent, that in all probability the sum of $100,000 would not produce a net income, after expenses of the trust, of more than $5,000 a year, for the reason that while the trustee had certain discretion as to the investments, all investments must be in securities of the character authorized by the laws of the State of New York for trust investments. However, in order to avoid any possibility of there being an accumulation of income which would be illegal under the laws of the State of New York, a clause 38 B.T.A. 51">*54 was inserted in the1938 BTA LEXIS 917">*923 trust agreement providing that if in any year there should be a net income in excess of $5,000 such excess should be paid in equal shares to each donor living at the time of the payment, and to the issue then living, if any, of any deceased donor.
The life beneficiary, Gordon Russell Thayer, survived the decedent herein.
At the time of the death of the decedent the principal of the trust was invested in accordance with the trust indenture and the respondent valued the trust principal at $79,324.61, to which valuation the petitioners make no objection.
Respondent determined that the decedent had a one-third interest in the trust property which, less the value of the life estate of Gordon Russell Thayer, had a value of $13,949.76. Respondent included this sum in the gross estate of decedent.
Petitioner, Grace Scofield Bonnet, was financially interested in maintaining a school in California, known as the Bonita School. The decedent was personally interested in the success of the school but had no financial interests involved. Prior to her death arrangements had been made between one Holbrook and petitioner Grace Scofield Bonnet and her husband, whereby Holbrook was to lease1938 BTA LEXIS 917">*924 from them certain real estate in California for the purpose of conducting the school, provided the sum of $2,400 was granted Holbrook for use for scholarship purposes during the scholastic year 1933-1934; and further provided that the parties would enter into a formal lease and agreement. As a part of this arrangement the decedent, prior to her death, entered into an oral agreement with her sister, petitioner Grace Scofield Bonnet, whereby decedent agreed to pay $1,000 of the $2,400 if petitioner Grace Scofield Bonnet agreed to pay the balance of $1,400. This she agreed to do. After decedent's death and pursuant to these arrangements the lease was formally executed by Holbrook as lessee and Grace Scofield Bonnet and her husband as lessors. The agreement for the payment of the $2,400 was also reduced to writing. After decedent's death, petitioners herein, as executrices of the estate of decedent, paid the sum of $1,000.
After the filing of the petition in this case, petitioners, as executrices of the estate, made expenditures totaling $1,174.15 in connection with the settlement of decedent's 1930 and 1931 income tax, which expenditures respondent concedes should be allowed as1938 BTA LEXIS 917">*925 deductions.
At the time petitioners paid the tax finally determined as due from decedent to the collector of internal revenue, they paid interest thereon to the date of death and, in addition, they paid the sum of $39.08 representing interest which had accrued since the decedent's death upon the assessment.
38 B.T.A. 51">*55 OPINION.
VAN FOSSAN: As heretofore indicated, the three issues presented by this case are (1) whether there should be included in the decedent's gross estate a proportionate interest in a certain irrevocable trust fund of which decedent was one of the creators; (2) whether there should be deducted from the gross estate the sum of $1,000 paid by petitioners as executrices of the estate pursuant to a promise made by the decedent prior to her death to aid a scholarship fund in a private school; and (3) whether or not interest accrued, subsequent to decedent's death, on a Federal income tax deficiency and paid by petitioners as executrices of the estate, might be deducted as an expense of the estate.
It is conceded by the stipulation of facts that the transfer in question is not a gift in contemplation of death. Respondent, however, urges that it is "a transfer, 1938 BTA LEXIS 917">*926 by trust * * * intended to take effect in possession or enjoyment at or after * * * death." (Sec. 302(c), Revenue Act of 1926.)
The parties to this proceeding are agreed that there is no dispute as to the facts, but rest their entire respective contentions upon the conclusion of law to be reached on the facts.
The law is now well established that there should not be included in the gross estate of the decedent property that has been transferred in trust by an absolute conveyance, with the provision, in the terms of the grant, that the property was to revert to the donor or creator of the trust in the event the beneficiary predeceased him. The landmark case on this principle is . In that case it was held that the event which gives rise to a transfer tax is the death of the decedent, with the resulting transfer of his estate by will or intestacy law, and that a transfer inter vivos to be taxable as a "transfer intended to take effect in possession or enjoyment at or after death" must have been made as a substitute for disposition by will or under intestacy law. The Court specifically held that the provisions1938 BTA LEXIS 917">*927 of an irrevocable trust estate that the estate should revert to the grantor in case the beneficiary predeceased him, where the latter contingency did not occur, created a situation wherein the corpus was not taxable as a "transfer intended to take effect in possession or enjoyment at or after death."
The reasoning of the Court clearly appears from the following quotation:
If, therefore, no interest in the property involved in a given case pass "from the possession, enjoyment, or control of the donor at his death," there is no interest with respect to which the decedent has created a trust intended to take effect in possession or enjoyment at or after his death. The grantor 38 B.T.A. 51">*56 here, by the trust instrument, left in himself no power to resume ownership, possession, or enjoyment, except upon a contingency in the nature of a condition subsequent, the occurrence of which was entirely fortuitous so far as any control, design, or volition on his part was concerned. After the execution of the trust he held no right in the trust estate which in any sense was the subject of testamentary disposition. His death passed no interest to any of the beneficiaries of the trust, and enlarged1938 BTA LEXIS 917">*928 none beyond what was conveyed by the indenture. His death simply put an end to what, at best, was a mere possibility of a reverter by extinguishing it; that is to say, by converting what was merely possible into an utter impossibility. This is well stated by the court below, : "It was only in the case of the happening of certain contingencies over which he had no control that the property would revert to him. One of these contingencies was the death of his daughter prior to his death, while the trust still continued; and the second was a termination by the trustees of the trust during the lifetime of the grantor. Neither of these contingencies occurred, and there was, during the decedent's lifetime, nothing more than a possibility that either would occur. In no proper sense was there an enlargement of the interests of the beneficiaries of the trust resulting from the death of the decedent. That event merely changed the possibility that the property would revert to him into an impossibility."
It is our opinion that the present case is identical in principle with the case last discussed. There, as here, the trust was irrevocable in so far1938 BTA LEXIS 917">*929 as the donor was concerned and there, as here, the donor of the trust predeceased the beneficiary. The conclusion necessarily follows that in the case at bar there was merely a possibility of reverter with interest passing by reason of the donor's death. The control and disposition of the property were to be governed by the terms and operation of the trust and were not affected by the donor's death.
The respondent's contention is that by the terms of the trust instrument the decedent and her two sisters, as grantors, parted only with a limited life interest in the income of the trust res not to exceed $5,000 a year in favor of the beneficiary, and retained for themselves the remainder interest not only in the income in excess of $5,000 per year but also in the trust property. The facts do not disclose this to be the true situation and we do not accede to the respondent's contention that the decedent had a remainder interest in one-third of the trust property, plus the interest remaining after the grant of specified income of the property to the beneficiary for life. Her interest, as we have said, was a mere possibility of reverter should the life beneficiary predecease her.
1938 BTA LEXIS 917">*930 Respondent relies strongly upon the case of . This is the same case relied upon by the Government in In the last cited case the Court at some length drew a distinction which is equally applicable in the present case. The Court said:
38 B.T.A. 51">*57 There [in the Klein case] 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 the title and all beneficial interest in the property, retaining no right with respect to it which would pass to any one as a result of his death. Unlike1938 BTA LEXIS 917">*931 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.
Respondent also relied upon , which was a case decided by the Second Circuit Court of Appeals prior to the decision of the Supreme Court in The Second Circuit Court of Appeals has since that time decided, per curiam, , affirming the Board on the authority of , therefore must be rejected as authority.
The principle established in , has been applied frequently by the Supreme Court, the intermediate courts, and this Board. 1
1938 BTA LEXIS 917">*932 Respondent's arguments, based on the retention by the decedent of a share in any possible excess income, are not well founded. The trust indenture was made in November 1927, prior to the amendment of the law by the Joint Resolution of Congress of March 5, 1931. ; . Moreover, by the stipulated facts, the provision in the instant trust agreement for the payment to the grantors of any trust income in excess of $5,000 per annum was but doing lip service to the New York law prohibiting an accumulation of income in such trusts. And in addition, the nature of the trust investments is such that the probability of excess trust income is remote to the degree of being impossible.
The second issue arises by reason of respondent's denial of a deduction of $1,000 paid by petitioners to the Bonita School. The basis for 38 B.T.A. 51">*58 this denial was that it was not shown that the pledge was contracted or incurred for a full and adequate consideration in money or money's worth.
By the stipulated facts, the decedent agreed with petitioner Grace Scofield Bonnet to pay $1,000 of the $2,4001938 BTA LEXIS 917">*933 scholarship fund if petitioner Grace Scofield Bonnet agreed to pay the balance of $1,400, which petitioner Grace Scofield Bonnet agreed to do.
The Board has many times had similar contentions before it and has consistently held that the monetary pledges of others constituted an adequate and full consideration within the meaning of the statute. ; ; affd., ; ; , affirmed per curiam,, and reversed on other issues, ; , affirming B.T.A. memorandum opinion; ; ; . We, therefore, hold that the $1,000 paid by petitioners toward the sum of $2,400 to be used for scholarship purposes in1938 BTA LEXIS 917">*934 connection with the Bonita School is deductible from the gross estate.
As stated in the findings of fact, after the filing of the petition in this case, petitioners, as executrices of the estate, made expenditures totaling $1,174.15 in connection with the litigation and settlement of decedent's 1930 and 1931 income tax. By the stipulation, respondent concedes that this sum should be allowed as a deduction from the gross estate for the purpose of computing the net estate and the tax thereon. This adjustment will be made under Rule 50.
The remaining issue concerns petitioners' contention that there should be allowed as a deduction from the gross estate the amount of interest paid respondent on a deficiency in income tax due by decedent, which interest accrued and was paid, together with the additional tax, after decedent's death.
We are unable to find a basis for allowing this deduction from the gross estate. Petitioners' contention is that the deduction should be permitted, either as a debt or as an administration expense. With this we do not agree. The court in 1938 BTA LEXIS 917">*935 , was confronted with this same question and said:
As to the item of $348,136.16 which represents interest on the income tax due from the decedent which accrued after his death, I can find no authority for deducting this from the gross estate of the decedent subject to federal estate tax. Section 302 of the Revenue Act of 1924 (43 Stat. 304) provides 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."
38 B.T.A. 51">*59 At the decedent's death, there was due the United States the sum of $1,680,395.67 as principal and $51,777.47 as interest on that principal. As a debt of the estate to the United States, both principal and interest accruing at that time were proper deductions. Interest accruing after the date of the death, however meritorious may have seemed the contention that the estate was not liable to such income tax, was not within the meaning of the act prescribing the time and method of computing the estate of the deceased person for the purposes of estate1938 BTA LEXIS 917">*936 taxes. To allow the deduction of interest accruing while resisting a valid claim against the estate might result in defeating the very purpose of the Estate Tax Law. * * *
Nor is the sum in question conceivably an administration expense. We, therefore, hold for respondent on this issue.
Decision will be entered under Rule 50.
Footnotes
1. ; ; (cf. Welch v. Hassett,↩ 90 Fed.(2d) (833); ; ; ; ; ; ; (cf. ); ; ; . Cf. ; ; .