*3028 1. Where decedent in 1922 created a trust the income of which was payable to him during his life and at his death the corpus vested in his children and the trust was irrevocable without the consent of all the beneficiaries, held that, since the trust was created prior to the enactment of the Revenue Act of 1924, the corpus is not subject to the estate tax imposed by that Act.
2. Credit claimed by petitioner on account of inheritance taxes paid to the States of Nebraska and New York in respect of property included in the gross estate for estate-tax purposes should be allowed in an amount not to exceed 25 per cent of the estate tax.
*108 The respondent has asserted a deficiency in estate taxes in the amount of $12,340.92. Petitioner alleges error by the respondent as follows:
(1) The inclusion in the gross estate of the corpus of a trust created by decedent in 1922 and distributed by the trustee two years subsequent to his death;
(2) The disallowance by respondent of a credit claimed by petitioner on account of inheritance taxes paid to the States*3029 of Nebraska and New York; and
(3) In charging interest at the rate of 1 per cent per month upon the amount of $182.93 by which the total tax determined exceeded *109 the amount shown upon the face of the return, such amount being the credit claimed on account of the payment of state inheritance taxes.
FINDINGS OF FACT.
The petitioner is the administrator of the estate of Edgar Martin Morsman who, prior to his death on April 6, 1925, was a resident of the State of Nebraska.
On August 1, 1922, decedent declared the following trust, which became effective on August 3, 1922, when the property was received by the trustee:
TRUST AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
That for and in consideration of the sum of $1.00 to me in hand paid by United States Trust Company, and in further consideration of the covenants and agreements herein contained to be kept and to be performed by said United States Trust Company, I do hereby sell, assign and transfer unto said United States Trust Company, a corporation organized under the laws of the State of Nebraska, the following notes, bonds, securities, choses in action and property, to-wit:
(Description of properties follows. *3030 )
TO HAVE AND TO HOLD the above described notes, bonds, securities, choses in action and property unto said United States Trust Company, its successors and assigns, but in trust and upon the following terms and conditions, to-wit:
1. Power to change the trustee of the trust hereby created is expressly reserved unto myself and my four sons, Joseph J. Morsman, Edgar M. Morsman, Jr., Frank S. Morsman and Robert P. Morsman. Change of trustee is to be made by serving written notice upon the existing trustee, notifying such trustee that a change has been made and giving the name of the successor in trust, said notice to be signed by the majority of the five persons above mentioned.
2. The trustee shall have full power to manage, sell, invest and reinvest the property constituting the trust hereby created, all according to the best judgment and discretion of said trustee or its successor in trust, provided, however, that in selling of said property and in the making of investments, the trustee shall accept and follow the written advice and request of myself and one of my said sons.
3. The income from said trust property shall be paid to me monthly during the term of my natural*3031 life and for a period of two years after my death the income shall be divided equally between my four sons, Joseph J. Morsman, Edgar M. Morsman, Jr., Frank S. Morsman and Robert P. Morsman.
4. Two years after my death the trust hereby created shall cease and terminate and all of said trust property shall be divided equally between my four sons, Joseph J. Morsman, Edgar M. Morsman, Jr., Frank S. Morsman and Robert P. Morsman.
5. In the event either of my said sons should die prior to two years after my death, leaving no issue surviving, *110 then and in such event the share of said trust, both principal and income, directed to be paid to such son shall be divided equally among the other of my said sons. And in the event either of my said sons should die prior to two years after my death, but leaving issue surviving, then and in such event the share of said trust, both principal and income, directed to be paid to such son, shall be paid to the issue of such deceased son, children of a deceased parent to take the share their parent would have taken had such parent not died.
6. The trustee hereunder, in the making of investments, shall have the right to purchase from*3032 itself for said trust securities dealt in by the trustee and which are proper for the investment of trust funds, and in such case said securities shall be sold to said trust at the same price at which the trustee sells the same to the public generally.
7. The trustee, from the income of the trust hereby created, shall pay all expenses incurred by it and connected with the management and preservation of said trust property, and for the services performed by the trustee the trustee shall receive three per cent of the net income produced by said trust.
8. The trustee shall semi-annually furnish to the beneficiary of this trust a report of the receipts and disbursements of said trust.
9. Any and all property hereafter assigned and conveyed by the undersigned to the trustee shall be and become a part of the principal of this trust, subject to all the terms and conditions hereof.
Signed this 1st day of August A.D. 1922.
EDGAR M. MORSMAN
Receipt of the above property is hereby acknowledged and acceptance of the trust created by the above instrument is hereby made this 3rd day of August, 1922.
UNITED STATES TRUST COMPANY
BY JOHN H. CALDWELL,
Vice President
*3033 The parties are agreed that the property constituting the trust estate is of a value of $379,540.43.
The decedent's estate was probated in the County Court of Douglas County, Nebraska, on October 22, 1925. The decree entered by the County Judge follows:
IN THE COUNTY COURT OF DOUGLAS COUNTY, NEBRASKA.
IN THE MATTER OF THE ESTATE OF EDGAR M. MORSMAN, DECEASED.
DECREE ON INHERITANCE TAX.
This matter coming on for hearing this 22nd day of October, 1925 on the report of Ralph E. Svoboda heretofore appointed to appraise the property in said estate and after examining said report and the records on file I find that Edgar M. Morsman late of Omaha, Douglas County, Nebraska, departed this life, intestate, at Omaha, Douglas CountyNebraska, on the 6th day of April, 1925, being possessed of real and personal property situate in the County of Douglas State of Nebraska of the value of $108581.31. That after deducting claims, court costs and expenses of administration in the sum of $7426.20 there remains a balance of $101,155.11 to be distributed. That according to the laws of the State of Nebraska, Joseph J. Morsman, son, receives property in the sum of $25288.80 and after deducting*3034 the examption allowed to him by law there remains the sum *111 of $15,288.80 which is subject to tax at the rate of 1% making the tax due on the share of said Joseph J. Morsman, $152.88. That Edgar M. Morsman, Jr., son, receives property in the sum of $25288.80 and after deducting the exemption allowed to him by law there remains the balance of $15288.80 which is subject to tax at the rate of 1% making the tax due on the share of Edgar M. Morsman, $152.88. That Frank S. Morsman, son receives property in the sum of $25288.80 and after deducting the exemption allowed to him by law there remains the balance of $15288.80 which is subject to tax at the rate of 1% making the tax due on the share of said Frank S. Morsman, $152.88. That Robert P. Morsman, son, receives property in the sum of $25288.80 and after deducting the exemption allowed to him by law there remains the balance of $15288.80 which is subject to tax at the rate of 1% making the tax due on the share of Robert P. Morsman, $152.88.
THEREFORE IT IS ORDERED, CONSIDERED AND ADJUDGED, that the administrator of said estate pay to the County Treasurer of Douglas County, Nebraska, the sum
It further appearing to the*3035 court that Ralph E. Svoboda has rendered of April 1925, provided, however, that if said tax is paid on or before the 16th day of April, 1926, said tax shall not be subject to interest.
It further appearing to the court that Rulph E. Svoboda has rendered valuable services in appraising the property of said estate,
IT IS HEREBY ORDERED, that the County Treasurer of Douglas County, Nebraska, pay to the said Ralph E. Svoboda the sum of $100.00 for his fee, out of any funds in his hands received from the payment of inheritance tax.
BY THE COURT:
BRYCE CRAWFORD, County Judge.
The property constituting the estate so probated consisted of certain real estate located in Omaha, Nebr., 368 shares of American Telephone & Telegraph Co. stock, $4,000 par value bonds of the Omaha & Council Bluffs Street Railway Co., $5,000 par value City of Beatrice bonds, farm mortgage $15,000, $25,000 par value Platte ValleyTelephone Co. bonds, and cash $1,764.65.
Taxes in the amount of $401.72 were paid to the State of New York on the transfer of 368 shares of American Telephone & Telegraph Co. stock, which was included in the estate probated in Nebraska. A transfer tax was paid to the State*3036 of New York in the amount of $131.71 on the transfer of 25 shares of United States Guaranty Trust Co., which property was a part of the trust fund. The property included in the trust estate was not probated in Nebraska, but at a subsequent date the property was considered by the county court for the purpose of fixing inheritance taxes payable to the State of Nebraska. It was stipulated by the administrator and the county attorney that the value of the property included in the trust was $150,000, and that that amount should be subject to inheritance taxes in the State of Nebraska. On this stipulation and with the consent of the parties the court entered a supplemental decree on November 13, 1925, which follows:
IN THE COUNTY COURT OF DOUGLAS COUNTY NEBRASKA
IN THE MATTER OF THE ESTATE OF EDGAR M. MORSMAN, DECEASED SUPPLEMENTAL INHERITANCE TAX DECREE
It having come to the attention of the court by the oral report of Ralph E. Svoboda heretofore appointed to appraise the property in said estate and *112 upon the stipulation entered into between Edgar M. Morsman, Jr., Administrator of said Estate, and W. W. Slabaugh, Assistant County Attorney, acting on behalf of the State*3037 of Nebraska, that property in the sum of One Hundred Fifty Thousand ($150,000) Dollars passed to the heirs of said deceased under a certain trust agreement and which is not subject to administration in the above entitled cause, the court finds that under the stipulation herein entered into that the sum of One Hundred Fifty Thousand ($150,000) Dollars is subject to tax, that under the terms of said trust agreement Joseph J. Morsman receives the sum of Thirty-seven Thousand Five Hundred ($37,500) Dollars which is subject to the additional tax of Three Hundred Seventy-five ( $375) Dollars; that Edgar M. Morsman, Jr., receives Thirty-seven Thousand Five Hundred ($37,500) Dollars which is subject to the additional tax of Three Hundred Seventy-five ( $375) Dollars; that Frank S. Morsman receives Thirty-seven Thousand Five Hundred ($37,500) Dollars which is subject to the additional tax of Three Hundred Seventy-five ( $375) Dollars; that Robert P. Morsman receives Thirty-seven Thousand Five Hundred ($37,500) Dollars which is subject to the additional tax of Three Hundred Seventy-five ( $375) Dollars.
THEREFORE IT IS ORDERED CONSIDERED AND ADJUDGED that the administrator of said estate*3038 pay to the County Treasurer of Douglas County, Nebraska the sum of Fifteen Hundred ($1500) Dollars in addition to the sum heretofore decreed.
AND IT FURTHER APPEARING TO THE COURT That Ralph E. Svoboda has rendered valuable services in appraising said property, it is hereby ordered that the County Treasurer of Douglas County, Nebraska pay to the said Ralph E. Svoboda the sum of One Hundred ( $100) Dollars in addition to the amount he has already received.
BY THE COURT
BRYCE CRAWFORD, County Judge.
On October 5, 1925, the petitioner filed his estate-tax return with the collector at Omaha. The return included the identical property which constituted the estate probated and administered in the County Court of Douglas County, Nebraska. The tax was calculated on the return at $531.71, and credit was taken for inheritance taxes paid to the State of Nebraska, reducing the balance of tax to $348.78, which amount was paid to the collector. At the time of filing the return no taxes had been paid to the State of New York and the supplemental decree of the county court, increasing the Nebraska inheritance taxes by the amount of $1,500, had not been entered.
OPINION.
LANSDON: *3039 The questions presented in this proceeding are, (1) whether the corpus of a certain trust is to be included in determining the value of the gross estate subject to tax; (2) whether petitioner is entitled to credit Federal estate taxes with the amount of inheritance taxes paid to the States of Nebraska and New York, and (3) whether respondent correctly determined that interest at the rate of 1 per cent per month attached to the deficiency determined upon the disallowance of the credit for state inheritance taxes paid.
*113 Our decision as to the first issue in this proceeding is governed by ; ; and . Cf. , and . The transfer made by deceased on August 1, 1922, was made under the provisions of the Revenue Act of 1921. His death occurred on April 6, 1925. Title IV (Estate Tax) of the Revenue Act of 1921 was repealed by section 1100(a) of the Revenue Act of 1924, approved June 2, 1924. *3040 Section 302(c) of the Revenue Act of 1924 is identical with section 402(c) of the Revenue Act of 1921, and section 402(c) of the Revenue Act of 1918.
The Supreme Court held that the latter section was invalid 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. The transfer herein involved is of the character of that referred to in Section 302(c) of the Revenue Act of 1924 can have no effect to include as a part of the gross estate the property transferred in trust by decedent on August 1, 1922.
The respondent contends that the estate is not entitled to credit on account of inheritance taxes paid to the States of New York and Nebraska, since petitioner has not complied with the requirements of article 9(a) of Regulations 68. The respondent further contends that the allowance or disallowance of the credit authorized by section 301(b) of the Revenue Act of 1924 is a matter over which the Board has no jurisdiction. The evidence is clear*3041 that the petitioner paid inheritance taxes to the State of Nebraska in the amount of $611.52, and that the tax was paid in respect of property included in the gross estate for Federal estate-tax purposes. The evidence is also clear that petitioner paid a transfer tax to the State of New York in the amount of $401.72, and that the tax was paid in respect of property included in the gross estate for Federal estate-tax purposes. A transfer tax paid to the State of New York in the amount of $131.71 was paid in respect of property included in the trust fund, which we have held did not constitute part of the gross estate for Federal estate-tax purposes. We are of the opinion that petitioner is entitled to credit the estate tax determined by the respondent with the inheritance taxes paid to the States of New York and Nebraska in the respective amounts of $401.72 and $611.52, such credit not to exceed 25 per cent of the amount determined under section 301(a) of *114 the Revenue Act of 1924. See , and the cases cited thereunder.
Reviewed by the Board.
Judgment will be entered under Rule 50.
GREEN, dissenting: I am unable to agree with so much of the foregoing opinion as relies upon Nichols v. Coolidge, supra, as authority for its position. In that case all of the transfers which the court found were intended to take effect in possession or enjoyment at or after death, were in fact made prior to the passage of the Revenue Act of 1916, which Act was the first to contain any provision with reference to such transfers. In this case the transfers were made on August 1, 1922, and thus were made after Congress had thrice enacted the provision of the law here under consideration.
In , the court said:
Undoubtedly, Congress may require that property subsequently transferred in contemplation of death be treated as part of the estate for purposes of taxation. This is necessary to prevent evasion and give practical effect to the exercise of admitted power, but the right is limited by the necessity.
Under the theory advanced for the United States, the arbitrary, whimsical and burdensome character of the challenged tax is plain enough. An excise is prescribed, but the amount of it is made to depend*3043 upon past lawful transactions, not testamentary in character and beyond recall. Property of small value transferred before death may have become immensely valuable, and the estate tax, swollen by this, may leave nothing for distribution. Real estate transferred years ago, when of small value, may be worth an enormous sum at the death. If the deceased leaves no estate there can be no tax; if, on the other hand, he leaves ten dollars both that and the real estate become liable Different estates must bear disproportionate burdens determined by what the deceased did one or twenty years before he died. See .
This court has recognized that a statute purporting to tax may be so arbitrary and capricious as to amount to confiscation and offend the Fifth Amendment. , L.R.A. 1917D, 414, Ann. Cas. 1917B, 713; . See, also, *3044 . 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. (Italic added.)
I think that the sentence last above quoted clearly indicates that the decision is not intended to dispose of many of the questions which may arise. I think that the decision is intended to reach only those questions which arise by reason of the fact that the transfers involved were made prior to the passage of the statute under which it was sought to measure and collect the tax.
*115 It seems to me that the situation here is wholly different. The Revenue Acts of 1916, 1918, and 1921 had each required that there be included in the gross estate the value*3045 of the interest transferred in contemplation of or intended to take effect in possession or enjoyment at or after death. Under such circumstances the effect is not "to impose on citizens burdens for doing what at the time of doing was unburdened." . Here the deceased was fully advised of the legal consequences of his act and no "burdens" have been added since his transfer. The tax which his estate is now called upon to pay is, at least in so far as this provision is concerned, computed exactly as it would have been had he died before the passage of the Revenue Act of 1924. This being true, the situation is so wholly different from that in Nichols v. Coolidge that the rule there announced is entirely inapplicable. For the same reason , is no precedent for the conclusion here reached. The facts in , are, so far as date of transfer is concerned, parallel with the facts of this case and I think that the decision there, if correct, was based upon the wrong ground.
In this dissenting opinion I have not attempted to discuss what*3046 appear to me to be the questions involved, but have contented myself with pointing out that this decision, if correct, is based upon a wholly wrong premise.
MARQUETTE, TRAMMELL, MORRIS, ARUNDELL, and MURDOCK agree with this dissent.