1929 BTA LEXIS 2177">*2177 Where the settlor of a trust reserved the right to alter, change or modify its provisions with the restriction that no part of the corpus should be withdrawn by him, it is held that, substantial rights with respect to the income and corpus of the trust ceasing only at the settlor's death, the corpus plus the accrued income should be included in computing the value of the gross estate for estate-tax purposes.
17 B.T.A. 1177">*1178 The respondent has asserted a deficiency in estate tax of $33,355.07. The single issue presented for determination is whether the respondent correctly included, in computing the gross estate of decedent, the value of certain property constituting the corpus and accrued income of a trust declared by decedent several years prior to his death.
All of the material facts are embodied in the petition and answer and in a stipulation of facts entered into by the parties, from which we make the following findings of fact.
FINDINGS OF FACT.
The petitioners are the executors of the estate of Thomas Cover, 1929 BTA LEXIS 2177">*2178 who died testate March 26, 1926, a resident of Winchester, Va.
On January 17, 1918, Thomas Cover executed a deed of trust to the Safe Deposit & Trust Co. of Baltimore, the material provisions of which are as follows:
KNOW ALL MEN BY THESE PRESENTS:
That I, THOMAS COVER, of Winchester, Virginia, do, out of the love and affection which I bear to my children and descendants and for the purpose of providing an income for them, hereby give, grant and assign unto the SAFE DEPOSIT AND TRUST COMPANY OF BALTIMORE, a body corporate of the State of Maryland, the securities enumerated on the Schedule hereto attached and made part hereof, to be held by it for the following uses and trust purposes, that is to say:
To collect the income therefrom and after paying thereout all taxes and charges, including a commission to the Trustee for all services under this deed of five per cent (5%) on the amount of income collected, to pay the remainder of such income on December 1st, 1918 and every six months thereafter to my children and the descendants of my deceased children living from time to time as said income is payable, such payments to be per stirpes; provided, however, that any surviving1929 BTA LEXIS 2177">*2179 wife or surviving husband of a deceased child of mine shall, during her or his unmarried life, receive on the first days of each June and December succeeding the death of such deceased child of mine one-third of one-eighth of the net income from the Trust Estate, to be deducted from the respective shares of the income of the descendants of such deceased children, if they shall leave descendants, and, if not, then from the income of the Trust Estate. The provision for the wives and husbands of my children herein made shall be operative only if said wives and husbands shall actually have lived upon amicable and harmonious terms with my son or daughter, as the case may be, for at least one year immediately preceding the time of the death of my son or daughter, and the Trustee shall assume they have so lived together unless it shall receive notice to the contrary from me or any one of my children.
17 B.T.A. 1177">*1179 The above Trust shall continue until the death of all my children and until the youngest grandchild of mine living at my death shall reach the age of twenty-one years, when it shall cease and the Trustee shall divide the principal of the Trust Estate among all of my descendants1929 BTA LEXIS 2177">*2180 then living, per stirpes.
If at the termination of the Trust as above provided there shall then be living wives or husbands of any deceased children of mine, the Trustee shall retain out of the shares from which such wives or husbands shall have been receiving the income hereinbefore provided to be paid them, as much of the principal of such share as may be necessary to provide for such payments, and at their respective deaths or remarriages I direct said Trustee to divide the principal thus retained, amongst those entitled (as above provided) their personal representatives and assigns.
Power is hereby conferred upon said Trustee to vary the investments of the Trust Estate in such manner as it may deem desirable, except that during my life only with my approval, and for the convenient management of the Trust, it is authorized to have registered in its name in its sole capacity without defining thereon the Trusts, all registered securities.
All payments hereunder to my children and descendants or other distributees shall be made to them direct, into their own hands and not into the hands of another, whether claiming by their authority or otherwise, provided, however, said Trustee1929 BTA LEXIS 2177">*2181 may during the minority of any of my descendants apply their share of the income to their support and education.
I hereby reserve to myself the right, at any time or times during my life, to alter, change or modify the Trusts hereby created, without the right to withdraw any part of the principal; any such change, alteration or modification by me to be evidenced by a paper writing under my hand and seal and lodged with said Trustee during my life-time.
WITNESS my hand and seal this 17th day of January, A.D. nineteen hundred and eighteen. Executed in duplicate.
(Signed) THOMAS COVER (Seal)
Certain other property was added to the trust by a deed dated January 8, 1919, and on January 17, 1919, pursuant to the power of modification reserved in the trust deed of January 17, 1918, the following instrument was executed:
KNOW ALL MEN BY THESE PRESENTS THAT whereas, I, THOMAS COVER, by my deed dated January 17, 1918, granted and assigned to the Safe Deposit and Trust Company of Baltimore, under the trusts therein set forth the property therein mentioned (and by supplement thereto dated January 8, 1919 I added further property thereto) which deed provides that the trust should1929 BTA LEXIS 2177">*2182 continue until after the death of all of my children and until the youngest grandchild of mine surviving at my death should reach the age of 21 years and should then terminate, and under which deed I reserved to myself the right at any time or times during my life to alter, change or modify the trusts thereby created, without the right to withdraw any part of the principal, any such change, alteration or modification to be evidenced by a paper writing under my hand and seal and lodged with said Trustee during my life.
NOW THEREFORE, in pursuance of the power of alteration so reserved by me, I do hereby direct that the said Safe Deposit and Trust Company of Baltimore, Trustee, shall at any time after January 1, 1925, pay to each of my grandchildren, Thomas Cover Barton, Lewis N. Barton, Jr. and Joseph Marx Barton, Jr., upon his request in writing the sum of Ten Thousand Dollars ($10,000) 17 B.T.A. 1177">*1180 out of the principal of said estate, and I confer upon the said Trustee the power to sell such portions of the principal as may be necessary to make such payments.
And I further direct that after each of said three sums of Ten Thousand Dollars has been paid, the said Trustee shall1929 BTA LEXIS 2177">*2183 semiannually on June 1st and December 1st of each year and until the termination of the trust charge the grand-child receiving said sum, or collect from him, interest at the rate of 4 1/4% per annum, the interest so charged or collected to be brought in and distributed with the other income from the trust estate and should such grandchild, so receiving said principal sum of Ten Thousand Dollars, die before the termination of the trust, the said interest shall be so charged to or collected from the persons who under the terms of said deed shall be entitled to that share of the income now payable to him.
THAT upon the termination of the trusts such of said three sums of Ten Thousand Dollars each as shall have been paid to my said three Grand-children shall be brought into the principal of said estate and in the division thereof charged against the shares of said grand-children respectively. If any of them who shall have received said sum of Ten Thousand Dollars be at that time deceased, then the sum so paid him shall be charged against the persons who shall under the terms of said deed be entitled to the share of the principal which would have been payable to such grand-child if1929 BTA LEXIS 2177">*2184 then living.
WITNESS my Hand and Seal this 17th day of January, nineteen hundred and nineteen. Executed in duplicate.
THOMAS COVER. (Seal)
Witness:
H. H. M. LEEAt the date of decedent's death on March 26, 1926, the above trust, as amended and modified, was in full force and effect and the trustee, the Safe Deposit & Trust Co. of Baltimore, held as the entire corpus of the trust securities of a total value of $391,920.78. At that date there had accrued income arising from such securities in the amount of $5,249.80.
The following is the stipulation of facts entered into and filed by the parties:
I.That the Deed of Trust of Thomas Cover to the Safe Deposit and Trust Company of Baltimore dated January 17, 1918, a true copy of which is filed as Exhibit C to the petition herein, was executed on that date by the said Thomas Cover and was not made in contemplation of death, and is not such a Deed of Trust as is embraced within the terms of paragraph (c) of section 302 of the Revenue Act of 1926.
II.That the Deed of Trust of Thomas Cover to the Safe Deposit and Trust Company of Baltimore dated January 17, 1919, a true copy of which is filed as Exhibit D to the1929 BTA LEXIS 2177">*2185 petition herein, was executed on that date by the said Thomas Cover and was not made in contemplation of death, and is not such a Deed of Trust as is embraced within the terms of paragraph (c) of section 302 of the Act of 1926.
17 B.T.A. 1177">*1181 III.
WHEREAS, it appears that there has been allowed as a credit against the tax claimed by the United States the sum of $51,352.69 on account of state inheritance taxes paid by said estate to the state of Virginia, such taxes having been imposed upon property other than that constituting the corpus of the said trust; and
WHEREAS, under the law of the state of Virginia, the state inheritance tax is fixed at a sum equal to not less than eighty (80%) per cent of the tax that shall be levied by the United States; and if the action of the Commissioner of Internal Revenue in determining that under and by virtue of subdivision (d) of section 302 of the Revenue Act of 1926 there should be included as part of the taxable estate of the said Thomas Cover, deceased, the stocks, bonds and other securities of the value of $391,920.78, being the corpus of the trust estate created by the said Deed of Trust executed January 17, 1918, by said Thomas Cover, 1929 BTA LEXIS 2177">*2186 to the Safe Deposit and Trust Company of Baltimore, together with certain accrued interest thereon, amounting to the sum of $5,249.80, is upheld, and a tax in the nature of a deficiency over and beyond that returned and paid by the said estate is determined, the state of Virginia will claim, and the said estate of Thomas Cover will have to pay, an additional inheritance tax to Virginia in a sum equal to eighty (80%) per cent of the deficiency determined;
IT IS AGREED by and between the parties hereto that in that event, against any such additional tax imposed by the United States the said estate of Thomas Cover, deceased, shall be entitled to have credited the amount, not in excess of eighty (80%) per cent of the United States deficiency tax, of any additional estate, legacy, inheritance or succession tax imposed on any of the property so included by the United States in the gross estate of said Thomas Cover, deceased, actually paid to the state of Virginia; PROVIDED, that the same shall have been paid and credit therefor claimed within three years after December 9, 1926, the date the return of the Executors of the estate of Thomas Cover, deceased, was filed with the Collector of1929 BTA LEXIS 2177">*2187 Internal Revenue for the District of Virginia.
OPINION.
LANSDON: The parties have stipulated that the declarations of trust were not made in contemplation of death and that they were not such transfers as are embraced within the terms of section 302(c) of the Revenue Act of 1926, which section deals with transfers made in contemplation of death and with those intended to take effect in possession or enjoyment at or after death.
The petitioners contend that the transfers herein involved were not intended to take effect in possession or enjoyment at or after death; that they were not transfers the enjoyment of which was subject to any change at the date of decedent's death through the exercise of a power to alter, amend or revoke, within the meaning of section 302(d) of the Revenue Act of 1926; and that section 302 is unconstitutional in so far as it includes as a part of the gross estate property transferred prior to the enactment of the Revenue Act of 1926.
17 B.T.A. 1177">*1182 Section 302 of the Revenue Act of 1926 provides, so far as material in the instant proceeding, as follows:
The value of the gross estate of the decedent shall be determined by including the value at the1929 BTA LEXIS 2177">*2188 time of his death of all property, real or personal, tangible or intangible, wherever situated -
* * *
(c) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, in contemplation of or intended to take effect in possession or enjoyment at or after his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * *
(d) To the extent of any interest therein of which the decedent has at any time made a transfer, by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke, or where the decedent relinquished any such power in contemplation of his death, except in case of a bona fide sale for an adequate and full consideration in money or money's worth. * * *
* * *
(h) Except as otherwise specifically provided therein subdivisions (b), (c), (d), (e), (f), and (g) of this section shall apply to the transfers, trusts, estates, interests, rights, powers, and relinquishment of powers, as severally enumerated1929 BTA LEXIS 2177">*2189 and described therein, whether made, created, arising, existing, exercised, or relinquished before or after the enactment of this Act.
* * *
In the declaration of trust dated January 17, 1918, Cover reserved to himself "the right * * * to alter, change, or modify the trust hereby created without the right to withdraw any part of the principal." Any such change was to be "evidenced by a paper writing under my hand and seal and lodged with said Trustee during my life-time." This, petitioners argue, was such a restricted reservation of power as to leave none of the economic benefits in the settlor and that the reservation was for the benefit of that class in whose interest the trust was created, namely, his children and descendants, rather than for the benefit of the settlor. We see nothing in the trust deed to warrant such a conclusion. As we read that instrument, the settlor held complete control over the distribution of the trust property up to the moment of his death, except that he could not withdraw the principal. He could have directed that one beneficiary be substituted for another; that the trust property be distributed among new beneficiaries; that the income be paid1929 BTA LEXIS 2177">*2190 to himself; or that it should accumulate. These are by no means the least substantial of the legal incidents of ownership. The Supreme Court has held, in Chase National Bank v. United States,278 U.S. 327">278 U.S. 327, that "the freeing of the remainder of the possibility of the exercise of that power" was sufficient to subject property to a tax.
17 B.T.A. 1177">*1183 In his brief counsel for the petitioners stressed the point that the beneficiaries of the trust took vested rights, subject only to being divested to the extent that the power to amend, alter, or modify reserved in the settlor might be exercised and that such a reservation of power does not prevent the vesting of an estate. This argument is completely answered by the Supreme Court in 278 U.S. 327">Chase National Bank v. United States, supra.In that case the decedent had taken out life insurance payable to his wife, reserving to himself the right to change the beneficiary. The face value of the policies was held to be subject to the estate tax. It was urged in that case that the wife's right vested prior to her husband's death. The court held that even if that were true, it would not be material and upon1929 BTA LEXIS 2177">*2191 the question of vesting said, quoting from Saltonstall v. Saltonstall,276 U.S. 260">276 U.S. 260:
So long as the privilege of succession has not been fully exercised it may be reached by the tax. See Cahen v. Brewster,203 U.S. 543">203 U.S. 543; Orr v. Gilman,183 U.S. 278">183 U.S. 278; 205 U.S. 466">Chanler v. Kelsey, supra; Moffitt v. Kelly, supra; Nickel v. Cole, supra. And in determining whether it has been so exercised technical distinctions between vested remainders and other interests are of little avail, for the shifting of the economic benefits and burdens of property, which is the subject of a succession tax, may even in the case of a vested remainder be restricted or suspended by other legal devices. A power of appointment reserved by the donor leaves the transfer, as to him, incomplete and subject to tax. Bullen v. Wisconsin,240 U.S. 625">240 U.S. 625. The beneficiary's acquisition of the property is equally incomplete whether the power be reserved to the donor or another.
In the instant proceeding the decedent had many substantial rights with respect to the trust property, which ceased only at his death. It is1929 BTA LEXIS 2177">*2192 this cessation of rights of the decedent which is the subject of the estate tax. 278 U.S. 327">Chase National Bank v. United States, supra;Edwards v. Slocum,264 U.S. 61">264 U.S. 61; Y.M.C.A. v. Davis,264 U.S. 47">264 U.S. 47; N.Y. Trust Co. v. Eisner,256 U.S. 345">256 U.S. 345. In the Chase National Bank case, supra, the Supreme Court stated:
Termination of the power of control at the time of death inures to the benefit of him who owns the property subject to the power and thus brings about, at death, the completion of that shifting of the economic benefits of property which is the real subject of the tax, just as effectively as would its exercise which latter may be subjected to a privilege tax, Chanler v. Kelsey,205 U.S. 466">205 U.S. 466. "To make a distinction between a general power and a limitation in fee is to grasp at a shadow while the substance escapes." Sugden, Powers (8th Ed.) 396; see Gray, Perpetuities (3d Ed. 1915) Sec. 526(c). And the non-exercise of the power may be as much a disposition of property testamentary in nature as would be its exercise at death, 1929 BTA LEXIS 2177">*2193 Bullen v. Wisconsin,240 U.S. 625">240 U.S. 625; cf. United States v. Robbins,269 U.S. 315">269 U.S. 315, 269 U.S. 315">327; Cohen v. Samuels, supra.
It is argued that the Chase National Bank case does not apply here, since Cover could not have withdrawn the corpus of the trust. That fact seems immaterial, however, since he had complete control over the benefits to be bestowed upon the beneficiaries. In the 17 B.T.A. 1177">*1184 Chase National Bank case the insured could have recovered during his life only the cash surrender value of the policy and yet the Supreme Court held that the face value of the policy was properly included in computing his gross estate at death.
In the recent Supreme Court case of Reinecke v. Northern Trust Co.,278 U.S. 339">278 U.S. 339, there were seven trusts involved, two of which contained a reservation of the right to revoke absolutely; the remaining five reserving the power to alter, change or modify with the consent of the beneficiaries. The court there stated, referring to the five trusts:
If it be assumed that the power to modify the trust was broad enough to authorize disposition of the trust property among new beneficiaries1929 BTA LEXIS 2177">*2194 or to revoke the trusts still it was not one vested in the settlor alone, as were the reserved powers of the two trusts. He could not effect any change in the beneficial interest in the trusts without the consent, in the case of four of the trusts, of the person entitled to that interest and in the case of one trust without the consent of a majority of those so entitled. Since the power to revoke or alter was dependent on the consent of the one entitled to the beneficial and consequently the adverse, interest, the trust for all practical purposes, had passed as completely from any control by decedent which might inure to his own benefit as if the gift had been absolute.
In the instant case power to alter, change or modify was reserved to decedent alone. He had absolute control of the beneficial interest. We think the transfers herein involved are more like the two trusts in the Reinecke case which the Supreme Court held were subject to the estate tax.
Subsection (h) of the Revenue Act of 1926 expressly makes section 302 retroactive. A similar section in the 1918 Act was held to be unconstitutional by the Supreme Court in 1929 BTA LEXIS 2177">*2195 Nichols v. Coolidge,274 U.S. 531">274 U.S. 531, since it attempted to include in the gross estate property transferred prior to the enactment of the statute. The constitutionality of section 402 of the Revenue Act of 1921, which corresponds to section 302 of the Revenue Act of 1926, was upheld by the Supreme Court in Reinecke v.278 U.S. 327"> Northern Trust Co., and Chase National Bank v. United States, supra, where a transfer was made before the enactment of the statute, but which was subject to a power of revocation in the transferor terminable at his death. The court stated in the Reinecke case:
As to the two trusts, it is argued that since they were created long before the passage of any statute imposing an estate tax the taxing statute if applied to them is unconstitutional and void, because retroactive, within the ruling of Nichols v. Coolidge,274 U.S. 531">274 U.S. 531. In that case it was held that the provisions of the similar section 402 of the 1918 Act, 40 Stat. 1097, making it applicable to trusts created before the passage of the act was in conflict with the Fifth Amendment of the federal Constitution and void as respects transfers completed before1929 BTA LEXIS 2177">*2196 any such statute was enacted. But in No. 77, Chase National17 B.T.A. 1177">*1185 Bank v. United States,278 U.S. 327">278 U.S. 327, decided this day, the decision is rested on the ground, earlier suggested with respect to the Fourteenth Amendment in Saltonstall v. Saltonstall,276 U.S. 260">276 U.S. 260, 276 U.S. 260">271, that a transfer made before the enactment of the statute now in question and subject to a power of revocation in the transferor, terminable at his death, is not complete until his death and hence section 402, as applied to it, is not retroactive where his death follows the passage of the statute. For that reason, stated more at length in our opinion in 278 U.S. 327">Chase National Bank v. United States, supra, we hold that the tax was rightly imposed on the transfers of the corpus of the two trusts and as to them the judgment of the court of appeals should be reversed.
It follows that the value of the property constituting the corpus of the trusts, plus the undistributed income which had accrued at the date of decedent's death, should be included in computing the gross estate of decedent for estate-tax purposes. See 1929 BTA LEXIS 2177">*2197 McCaughn v. Fidelity Trust Co., 34 Fed.(2d) 443.
Pursuant to the stipulation of the parties, the deficiency herein determined should be credited with inheritance taxes paid to the State of Virginia.
Reviewed by the Board.
Decision will be entered under Rule 50.