*1263 Held, that the trust here involved was not intended to take effect in possession or enjoyment at or after decedent's death, within the purview of section 302(c) of the Revenue Act of 1926, and that the respondent erred in including in the decedent's gross estate the value of the corpus of the trust, less the estimated present value of the remainder interest of an educational institution that was to receive the trust property upon the termination of the trust.
*708 The Commissioner determined a deficiency of $2,754.39 in estate tax, against which he has allowed credit for state inheritance tax, leaving the amount of $1,689.22 for assessment. By amended answer, the Commissioner duly asserts claim for an increased deficiency in the amount of $4,823.90.
The Commissioner admitted error as alleged by the petitioners, as follows:
(a) The Commissioner determined that the income of property held by the Trustees of the HARVARD MUTUAL FOUNDATION for the benefit of CAROLINE B. FOSTER, during her life, passed under and by virtue of the Will of CAROLINE*1264 B. FOSTER or of the exercise of a power of appointment in her Will - whereas the property passed under said trust of the HARVARD MUTUAL FOUNDATION in accordance with the special agreement made thereunder.
(b) The Commissioner determined that the income of the property held by the Trustees of the HARVARD MUTUAL FOUNDATION for the benefit of CAROLINE B. FOSTER during her life should be added to the gross estate of said CAROLINE *709 B. FOSTER for the purpose of determining the Estate Tax thereon at an aggregate value of $122,745.28 * * *.
* * *
(d) The Commissioner determined that said CAROLINE B. FOSTER had at the time of her death power of appointment over the income of her contribution to the HARVARD MUTUAL FOUNDATION * * *.
By his amended answer, the Commissioner makes the following affirmative allegations:
(7) Avers that the value of the entire property transferred by this decedent to the Harvard Mutual Foundation less the remainder interest therein passing to Harvard College upon the termination of the trust should be included in the gross estate as a transfer intended to take effect in possession or enjoyment at or after death within the meaning of Section*1265 302(c) of the Revenue Act of 1926.
(8) Avers that the value of the entire property transferred by this decedent to the Harvard Mutual Foundation less the remainder interest therein passing to Harvard College upon the termination of the trust should be included in the taxable net estate.
(9) Avers that as of April 24, 1926, the date of the decedent's death the remainder to Harvard College had a value of $12,932.13, and that all of the other interests in the foundation had a value of $213,411.33 as of said date.
The facts were stipulated.
FINDINGS OF FACT.
The petitioners are the duly appointed executors of the will of Caroline B. Foster. Their address is 15 State Street, Boston, Massachusetts.
During her lifetime, Caroline B. Foster transferred to the Harvard Mutual Foundation property that had an aggregate value of $226,343.46 on April 24, 1926, the date of her death.
This property was transferred by the decedent to the trustees of the Harvard Mutual Foundation as a special fund in accordance with the second article of the declaration of trust dated March 4, 1913, as amended June 16, 1913. In so far as material hereto, the declaration of trust, as amended, is*1266 as follows:
First. To hold the said fund and all additions thereto invested, in whole or in part, at the discretion of the trustees hereunder in the shares of a national bank or other corporation, or in other property, real or personal, and to exercise all powers as stockholders in any corporation in which funds of the trust may be invested, and in the event that any or all of the trustees be elected directors or officers of any such corporation, then also, as such directors or officers, to manage such corporation as to them shall seem to be safe and conservative, and shall promote the sound development of the business thereof.
Second. To receive and accept from any source, at the discretion of the trustees, other funds or property, at such agreed valuation, and with such provisions relating to income therefrom, and the payment of the principal thereof at or before the termination hereof, by special agreement with the contributors thereof, as shall in the opinion of the trustees be fair and equitable *710 to the original and all preceding contributors; the same to be kept as a special fund or funds, or to be added to and made a part of the original fund, as such*1267 special agreement shall provide, and in the absence of such provision, as and when the trustees in their discretion shall decide.
Third. To sell for cash or credit the whole or any portion of said shares or other property at any time held by the trustees hereunder, and to invest and reinvest the proceeds and funds of the trust in shares of banking institutions, real estate or other property, and to exchange such shares or other property for property, real or personal, in the absolute discretion of the trustees, and to manage and deal with and in relation to all of the property of the trust hereby created, and any part thereof, in all respects as if the trustees were the sole beneficial owners thereof * * *.
* * *
Sixth. This trust shall continue for twenty years after the decease of the last survivor of the following named persons: [Here follows a list of the names of 21 then living individuals.]
The death of a beneficiary shall not terminate this trust. The sole right, claim and interest of the contributors hereunder shall be the contract of the trustees to hold and manage the trust property and to dispose of the same as herein provided.
Seventh. During*1268 the term of this trust the net income from the respective funds, after deducting the expenses of administration thereof, shall be determined, divided, applied, and paid over in each year at least as often as annually as follows:
(1) A dividend of all such net income earned during any fiscal year by any fund held by the trustees, up to but not exceeding five per cent per annum, shall first be declared and shall be paid to the contributors to that fund on the sums set against their respective names for their respective lives, and upon the death of a contributor, to the appointee thereof under his will, and in default of such appointment, to his issue per stirpes living at the time each dividend is declared, and if there be no such appointment and no such issue living at the time any dividend be declared, then to the President and Fellows of Harvard College, except that on contributions accepted by the trustees under special provisions payment shall be made in accordance with those provisions.
* * *
Eighth. Upon the expiration of the period of this trust, the trustees shall continue to act in their capacity as trustees for the winding up of the affirs of the trust and shall*1269 have power to sell the trust property, and after discharging all outstanding obligations, and upon receipt of due security to them against any possible or contingent liabilities that may arise against them hereunder, shall pay over to the President and Fellows of Harvard College the trust fund remaining in their possession and not otherwise disposed of under special agreement with a contributor, with all additions thereto hereunder, and less any deductions therefrom due to losses suffered in the course of investment, the same to be held by said President and Fellows of Harvard College in their general funds in the names of the contributors in proportion to their contributions; the income from these funds to be used by said President and Fellows for the benefit of the college without restriction.
* * *
Tenth. This trust may be amended, except as to the provisions of clauses fourth, sixth, and seventh, by instrument in writing signed by all the trustees and approved by the President and Fellows of Harvard College. A trustee may be removed by instrument in writing signed by all the other trustees, and *711 approved by the President and Fellows of Harvard College. A certificate*1270 of the approval by the President and Fellows of Harvard College of an instrument appointing or removing a trustee, or amending the trust, shall be conclusive evidence of such approval, and such instrument shall be recorded in the Registry of Deeds for Suffolk County, Massachusetts.
The agreement with respect to the decedent's contribution is contained in the following "Receipt of the Trustees of the Harvard Mutual Foundation," dated November 1, 1916:
The TRUSTEES of the HARVARD MUTUAL FOUNDATION acknowledge receipt on this date from CAROLINE B. FOSTER, Contributor of the following property to be held by them as a Special Fund during the life of said CAROLINE B. FOSTER, and until its conversion by them at their option, thereafter at such valuation as at the time of conversion shall seem to the Trustees fair and equitable into the General Fund of said Foundation for the benefit of the issue of said CAROLINE B. FOSTER.
During the existence of this Special Fund and until its conversion into the General Fund, it is agreed and understood that the entire income from the Special Fund (except the 5% trustees commissions and other proper charges) shall be paid to said CAROLINE B. FOSTER*1271 or to her issue per stirpes.
The trustees of the Harvard Mutual Foundation have not converted the special fund gifts of the decedent into the general fund of the Harvard Mutual Foundation.
The decedent was survived by four children, Mary C. and Susan C. Foster, unmarried daughters, ages 65 and 64 years, respectively; Alice F. Bowditch, age 58 years, who then had one son, W. Candler Bowditch, age 31 years; and Charles H. W. Foster, age 67 years, who then had seven children living, the youngest being 27 years old.
In so far as material to our determination, the decedent's will, executed November 22, 1916, is as follows:
SIXTEENTH: A portion of my estate has been placed with the trustees of the Harvard Mutual Foundation in and upon the trusts established by instrument creating that organization. Pursuant to the powers reserved to me in said trust fund I hereby nominate, constitute and appoint my four children as the beneficiaries of the income of the fund contributed by me to said Harvard Mutual Foundation, said appointees to share per stirpes and not per capita in said income and the child or children of any deceased child of mine to receive the share of income to which my*1272 child, if living, would be entitled under the provisions of this will and of said trust.
I further appoint the children of my son, Charles H. W. Foster, who may survive him, to receive his share of the income after his death and so long as they shall live. I appoint my grandson, William Candler Bowditch, son of Alice Foster Bowditch, to receive her share of the income after her death and so long as he shall live.
In the deficiency notice there was included in the gross estate the following items based upon an estimated income of 4 per cent on the value of the property transferred to the Harvard Mutual Foundation:
| Present worth of annuity over the expectancy of Susan C. Foster | $17,757.72 |
| Present worth of annuity over the expectancy of Mary C. Foster | 18,467.89 |
| Present worth of annuity over the expectancy of W. C. Bowditch | 40,703.27 |
| Present worth of annuity over the expectancy of youngest child of | |
| C. H. W. Foster | 45,816.40 |
| Total | 122,745.28 |
*712 As provided in the sixth article of the declaration of trust dated March 4, 1913, as amended, the Harvard Mutual Foundation was to continue for a period of 20 years after the death of the last survivor*1273 of 21 persons, whose names and ages as of April 24, 1926, were as follows:
| Name | Age |
| Beatrice Cobb | 34 |
| Hildegard Boughton Cobb | 33 |
| Louise Katrina Foot | 15 |
| Ellen Bellows Foot | 13 |
| Florence Cobb Brooks | 36 |
| Ella Lowell Lyman | 37 |
| Susan C. Lyman | 35 |
| Arthur T. Lyman | 32 |
| Margaret Lyman | 31 |
| Julia Lyman | 28 |
| Miriam Ladd | 26 |
| Alexander H. Ladd | 25 |
| Robert Watson Ladd | 23 |
| Josephine Crocker | 23 |
| Marjorie Crocker | 31 |
| Edith H. Foster | 33 |
| Caroline W. Foster | 30 |
| Barbara Foster | 27 |
| 1 John W. Foster | |
| Charles Francis Adams | 16 |
| Catherine Adams | 24 |
OPINION.
SMITH: On brief, the respondent states his contention as follows:
It is the contention of the Commissioner there the transfer to the decedent's issue was one intended to take effect in possession or enjoyment at or after the decedent's death within the meaning of Section 302(c) and that the value of the entire property is subject to tax with*1274 the exception of the remainder interest therein deductible under Section 303(a)(3) as a bequest to charity.
On brief, the respondent discusses generally the common law relative to contingent remainders, and treats the question before us as though the status of the rights of the decedent's issue is determinative of the question. Similar rights were not considered to have affected the transfer involved in Shukert v. Allen,273 U.S. 545">273 U.S. 545. To illustrate the erroneous conclusion reached by that line of reasoning, the respondent argues that upon the death of the decedent "for the first time the children possessed interests susceptible of definite valuation and subject to all of the incidents of absolute ownership," which interests he values not upon the basis of their life expectancy, during which they could receive the income from the trust (although that was the basis of his first determination of the deficiency), *713 but upon the basis of the value of the trust property at the decedent's death, less the then present value of the remainder interest of Harvard College, postponed for 20 years beyond the life expectancy of the youngest of 20 named persons living*1275 at the basic date. Under the terms of the special agreement by which the decedent conveyed property to the Harvard Mutual Foundation in November, 1916, and the terms of her will, also executed in November, 1916, her issue shared per stirpes and not per capita in the income of the fund after her death, and the children of the decedent's married son and daughter were to receive per stirpes the share of the income after the death of their parents. Obviously, if the interests of the decedent's issue are susceptible of valuation, it is either upon the basis of their life expectancy or the value of the property at the basic date, less the value of the remainder postponed after that expectancy, and not upon the basis contended for by the respondent. Cf. Henry R. Ickelheimer et al.,14 B.T.A. 1317">14 B.T.A. 1317; William Nelson Cromwell et al., Executors,24 B.T.A. 461">24 B.T.A. 461. If anything was transferred from the decedent at death to her issue, it was not the right to receive the income in question per autre vie, because that was merely the term of the trust, and there might have been a failure of "issue" long before the termination of the Harvard Mutual Foundation, *1276 and the conversion of this special fund into the general fund at the option of the trustees, in which event the income went to Harvard College until the termination of the trust, at which time Harvard College received the corpus of the trust. The Commissioner, having admitted error, as alleged by petitioners, in determining that the income of the property in question "passed under and by virtue of the Will" of the decedent," or of the exercise of a power of appointment in her Will," and in including same in decedent's gross estate at a value of $122,745.28 (the estimated present worth of a 4 per cent income on the value of the property transferred to the Harvard Mutual Foundation over the separate expectancies of Mary C. and Susan C. Foster, W. C. Bowditch, and the youngest child of C. H. W. Foster), there remains only the issue as to whether the transfer by the decedent to the Harvard Mutual Foundation in 1916 was a transfer of property "to take effect in possession or enjoyment at or after" her death in 1926 within the purview of section 302(c) of the Revenue Act of 1926.
The petitioners contend that the decedent's gifts to the Harvard Mutual Foundation were absolute, complete, *1277 and beyond her control, and nothing passed upon her death to the living - that there was no taxable transfer of property - citing May v. Heiner,281 U.S. 238">281 U.S. 238; Burnet v. Northern Trust Co.,283 U.S. 782">283 U.S. 782; Morsman v. Burnet,283 U.S. 783">283 U.S. 783; McCormick v. Burnet,283 U.S. 784">283 U.S. 784.
*714 The respondent argues that May v. Heiner, supra, and the other cases cited by petitioners are distinguishable in that they "involved interests which had vested prior to death or which terminated with death," whereas here we are concerned with interests that vested upon the death of the decedent, and cites Tyler v. United States,281 U.S. 497">281 U.S. 497, and Klein v. United States,283 U.S. 231">283 U.S. 231. The Tyler case dealt with an estate by the entirety and the Klein case applied the rule of the Tyler case to a contingent remainder which vested by reason of the death of the grantor, who had reserved to himself the reversion. In both cases, the remainder interest in the property involved was contingent upon survivorship, the survivor took by reason of the death of*1278 the decedent - that event effected the transfer. Similar contentions regarding the applicability of the principles of these cases were decided adversely to the respondent in Stephen Peabody et al., Executors,24 B.T.A. 787">24 B.T.A. 787.
The respondent also relies upon Sargent v. White, 50 Fed.(2d) 410, decided by the Circuit Court of Appeals for the First Circuit (to which Circuit an appeal from our decision would lie). That decision followed Klein v. United States, supra, in which the court said:
* * * differs from this case to this extent, that the grantor by deed transferred a life estate in some real property directly to his wife, expressly reserving to himself the fee, which, or as in this case the absolute title to the trust funds, passed to the wife at his death in case she survived him.
The court, in distinguishing May v. Heiner, supra, said:
* * * the absolute disposition of the trust property was provided for in the trust instrument and only the income was reserved to the husband of the grantor and to herself for life, if she survived him.
*1279 The stipulated facts show that the decedent made an absolute disposition of the property by irrevocable transfer to the Harvard Mutual Foundation, reserving to herself and her issue the right to receive the net income hereof. The decedent had no control over the trustees and their handling of the trust fund, and she had no power of disposition of the corpus of the fund by will or otherwise (cf. Edward J. Hancy, Executor,17 B.T.A. 464">17 B.T.A. 464; John S. Montgomery et al., Executors,17 B.T.A. 491">17 B.T.A. 491; Cortlandt F. Bishop, Executor,23 B.T.A. 920">23 B.T.A. 920, 928); neither was there a possibility of the property reverting to her or going to her heirs upon the happening of any event (cf. Sargent v. White, supra ). As the Supreme Court said in May v. Heiner, supra:
* * * no interest in the property held under the trust deed passed from her to the living; title thereto had been definitely fixed by the trust deed. The interest therein which she possessed immediately prior to her death was obliterated by that event.
*715 The May v. Heiner case arose under section 402(c) of the Revenue Act of 1918, which*1280 is substantially the same as section 302(c) of the Revenue Act of 1926, which the respondent seeks to apply to the trust property involved in the instant proceeding. That decision was based upon the earlier decision in Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339, wherein the court said:
It is of significance, although not conclusive, that the only section imposing the tax, section 401, does so on the net estate of decedents and that the miscellaneous items of property required by section 402 to be brought into the gross estate for the purpose of computing the tax, unless the present remainders be an exception, are either property transferred in contemplation of death or property passing out of the control, possession or enjoyment of the decedent at his death. They are property held by the decedent in joint tenancy or by the entirety, property of another subject to the decedent's power of appointment and insurance policies effected by the decedent on his own life, payable to his estate or to others at his death. The two sections read together indicate no purpose to tax completed gifts made by the donor in his lifetime not in contemplation of death, where he*1281 has retained no such control, possession or enjoyment. In the light of the general purpose of the statute and the language of section 401 explicitly imposing the tax on net estates of decedents, we think it at least doubtful whether the trusts or interests in a trust intended to be reached by the phrase in section 402(c) "to take effect in possession or enjoyment at or after his death," include any others than those passing from the possession, enjoyment or control of the donor at his death and so taxable as transfers at death under section 401. That doubt must be resolved in favor of the taxpayer. * * *
The decedent's life estate was obliterated by her death; the right of her issue to receive the income after her death was established by the trust agreement, and the clause in her will designating the beneficiaries after her death, while ostensibly the exercise of the power of appointment, was in reality executed almost contemporaneously and in accord with the special agreement regarding the trust property and was not an enlargement of that agreement. Where, as here, irrevocable gifts are made to a trust and the donor reserves the income to himself for life and the right to designate*1282 the beneficiaries of the income after his death, which right is exercised in accordance with the trust agreement, it is doubtful whether any portion of the trust property should be included in the decedent's gross estate, in view of the decision in May v. Heiner, supra. Such doubts should be resolved in favor of the taxpayer (Gould v. Gould,245 U.S. 151">245 U.S. 151, 153), particularly in view of the fact that immediately following the per curiam decisions in Burnet v. Northern Trust Co., supra;Morsman v. Burnet, supra; and McCormick v. Burnet, supra,Congress amended section 302(c) of the Revenue Act of 1926 by joint resolution (Public 131), approved March 4, 1931, which specifically provides for the inclusion of property transferred in trust where the transferor "has retained for his life * * * the income from the property or * * * the right to designate the persons who shall * * * enjoy * * * the income therefrom." The amendment was not retroactive and has been applied only to transfers "made after 10.30 P.M. * * * March 3, 1931." Treasury Decision 4314. *1283 See United States v. Field,255 U.S. 257">255 U.S. 257.
The respondent's action in including the trust property in the decedent's gross estate and deducting therefrom the value of the remainder interest of Harvard College, is reversed. Cf. Lillian M. Wheeler, Executrix,20 B.T.A. 695">20 B.T.A. 695; Frederic Ullman et al., Executors,20 B.T.A. 782">20 B.T.A. 782; Frances Plumer McIlhenny et al., Executors,22 B.T.A. 1093">22 B.T.A. 1093; Colonial Trust Co. et al., Executors,22 B.T.A. 1377">22 B.T.A. 1377; Nanaline H. Duke et al., Executors,23 B.T.A. 1104">23 B.T.A. 1104; Frank G. Williams et al., Executors,25 B.T.A. 1078">25 B.T.A. 1078.
Judgment will be entered under Rule 50.
Footnotes
1. Died September 9, 1913.
The remainder interest in said $226,343.46 contributed by the decedent to the Harvard Mutual Foundation, postponed for 20 years after the death of the survivor of the above named persons, had a value as of April 24, 1926, of $12,932.13. ↩