Hazard v. Commissioner , 40 B.T.A. 204 ( 1939 )

WILLIAM TILDEN PELTON HAZARD, KATHARINE HAZARD MOSS AND JESSIE HAZARD LEONARD, EXECUTORS OF THE ESTATE OF LAURA PELTON HAZARD, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

IRVING TRUST COMPANY, TRUSTEE UNDER AN INDENTURE OF TRUST OF LAURA PELTON HAZARD, DATED NOVEMBER 27, 1928, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hazard v. Commissioner

Docket Nos. 89684, 89685.

United States Board of Tax Appeals

40 B.T.A. 204; 1939 BTA LEXIS 884;

June 30, 1939, Promulgated

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">*884 The grantor executed a trust with discretionary power in the trustee to pay the net income therefrom to the grantor, and apply the excess on certain debts of the grantor. Upon liquidation of the debts, all of the net income was distributable to the grantor. The trustee could use corpus to pay off existing, but not future, debts of the grantor. Upon the death of the grantor, corpus was to be held in trusts for the benefit of some of the grantor's children, with remainders over. Held, that the trust was irrevocable and that the value of the corpus does not constitute a part of the grantor's gross estate, within the meaning of section 302(c) and (d) of the Revenue Act of 1926, as amended.

Orrin G. Judd, Esq., for the petitioners.

Frank M. Thompson, Jr., Esq., for the respondent.

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DISNEY

">*204 These proceedings, consolidated for hearing and report, in Docket No. 89684 involve the redetermination of a deficiency in estate tax in the amount of $46,838.51, and in Docket No. 89685 involve liability for the tax as a transferee. Aside from the transferee liability ">*205 of the petitioner in Docket No. 89685, the sole issue in the proceedings">*885 is whether there should be included in gross estate of the petitioners' decedent the value of the corpus of a certain trust, all other issues raised by the petitioners having been abandoned or settled by stipulation.

FINDINGS OF FACT.

The petitioners in Docket No. 89684 are the duly qualified executors of Laura Pelton Hazard, who died September 3, 1934, at the age of 71 while a resident of New York City. The petitioner in Docket No. 89685 is the trustee under a certain trust indenture executed by the decedent, Laura Pelton Hazard, on November 27, 1928, the value of the corpus of which at the time of her death being the question in controversy.

In 1922 the decedent had property of a value of about $737,500. By the fall of 1928 she had spent about 60 percent of the principal, in addition to income each year of between $55,000 and $75,000, and had incurred a large amount of debts, all principally for general living expenses and advances to some of her children. The rate of her spending would have rendered the decedent destitute within a few years, unless action was taken to preserve her assets from the effects of her own extravagance.

In the fall of 1928 the decedent consulted">*886 an attorney for the purpose of securing a loan on a country estate located at Cedarhurst, Long Island. The discussion had on the subject revealed that the decedent's property at that time consisted principally of 16,000 shares of common stock of the Sterling Salt Co., a closely held corporation, all of which, except 100 shares, was pledged as security for various bank loans; 350 shares of stock of the Halite & Northern Railroad Co.; a demand note of the Michiga Salt Works of the face amount of $249,845.93; the country estate in Cedarhurst, which the decedent had endeavored to sell without success; and an inerest in a trust known as the Tilden trust. All of the assets were unmarketable. Only $19,006.21 was eventually realized on the note.

After an investigation into, and consideration of, the decedent's financial predicament, the attorney advised her to transfer her property in trust for the liquidation of her debts if she wished to avoid insolvency. The decedent accepted his advice.

On November 27, 1928, the decedent executed an instrument transferring the stocks and note to the petitioner in docket No. 89685 in trust for the purpose of holding, managing, investing, and reinvesting">*887 the assets, and any other property transferred to it thereunder, collecting the income therefrom, and:

* * * to apply to the use of the Grantor during her life, from time to time, out of the net income such amounts as the Trustee in its sole, absolute and ">*206 uncontrolled discretion may deem necessary or advisable for the best interests of the Grantor, and to apply to the use of the Grantor any balance of such net income by the payment of the debts and obligations set forth in said Schedule "A" or any interest thereon or expenses incidental thereto, and thereafter, when all the debts and obligations set forth in said Schedule "A" have been paid or extinguished, to apply to the use of the Grantor, from time to time, all of the net income therefrom; * * *

Upon the death of the grantor the corpus was to be divided in equal shares and transferred in trust for the benefit of four of decedent's six children during their lifetime, with provision for other division in the event any child predeceased the decedent, and further distribution upon the termination of the trusts in favor of the children. The trustee was authorized in its discretion to discharge any part or all of the">*888 debts of the decedent set forth in schedule "A" of the trust "by applying the proceeds of the sale, pledge or other disposition of any part or all of the corpus of this trust, notwithstanding any other provision in this agreement inconsistent hereto." Other provisions of the trust deed read as follows:

The Trustee is hereby expressly authorized and empowered in its discretion at any time and from time to time to borrow such sums of money as it may deem proper for any purpose or purposes it deems proper as well as for the purpose of paying off, in whole or in part, or otherwise liquidating, the debts and obligations set forth in Schedule "A" hereof, or hereafter incurred by the Trustee, or any interest thereon or expenses incidental thereto; to renew existing or future loans whether contracted by the Grantor or by the Trustee; to these ends to pledge as collateral security any part or all of the principal of the trust fund, including any or all principal redeemed by the payment, liquidation or other disposition of prior loans.

* * *

This agreement and any and all of the provisions thereof and the trust hereby created shall be and are hereby declared to be irrevocable.

The">*889 debts set out in schedule "A" of the trust consisted of bank loans in the amount of $157,600 secured by 15,900 shares of common stock of the Sterling Salt Co., unsecured loans of $1,500, and numerous other items aggregating $51,274.68, a total indebtedness of $210,374.68. The provision respecting the renewal of loans was inserted in the trust instrument for the purpose of joining the decedent in case it was necessary to make a new loan to take up an existing loan and her signature was required in connection therewith.

Thereafter the real property in Cedarhurst was sold and the proceeds of sale were added to the corpus of the trust. The debts listed in schedule "A" of the trust agreement were paid by the trustee out of principal and income of the trust. No debts incurred by the decedent after the creation of the trust were paid by the trustee out of principal of income of the trust.

">*207 The trustee did not at any time after the execution of the trust deed renew any loans contracted by the decedent or borrow money for the payment of loans other than those listed in the trust.

In December 1930 the trustee informed the decedent, in response to a request for about $29,000">*890 to pay debts accumulated by her since the execution of the trust, that it could not provide her with funds in excess of the amount of income of the trust.

The decedent enjoyed excellent health at the time the trust was created and thereafter, except for a mild attack of bronchial pneumonia in February 1929, until shortly before her death.

In his determination of the deficiency the respondent found that the executors had $24,835.43 available in the estate for the payment of debts and charges, and included the corpus of the trust in gross estate at a value of $432,740.68.

OPINION.

DISNEY: The respondent concedes that in view of , the grantor's reservation of income does not alone constitute a ground for including the value of the trust property in gross estate and that the fact need only be considered in connection with other evidence of record as indicating a transfer in trust to take effect in possession or enjoyment at or after death. His position is that the trust instrument, read in the light of evidence in connection therewith, indicates a testamentary disposition of property subject to use of income therefrom and">*891 the proceeds of sale of corpus to pay indebtedness of the grantor existing at the time of, and arising subsequent to, the creation of the trust. On this point he contends that any desire on the part of the grantor to protect her property from her own extravagance might furnish a motive for the creation of a trust for her lifetime, but that the accomplishment of such a purpose furnishes no motive for the transfer of the remainder of the trust after her death. Disposition of the corpus of the trust after her death would, he argues, appear to be without a motive, lacking which the natural presumption is that it was in contemplation of death, within the meaning of section 302(d). "The mere purpose to make provision for children after a donor's death is not enough conclusively to establish that action to that end was 'in contemplation of death.'" . Nothing else is relied upon to show that the transfer was made in contemplation of death and the evidence of record establishes that the transfer resulted from motives associated with life, and was not made in contemplation of death.

To prevent further spending of principal">*892 in excess of such amount as the trustee in his sole discretion regarded as necessary to satisfy the debts listed in the deed and to conserve what remained of the ">*208 corpus for the production of income for distribution from time to time to the grantor for the remainder of her life, may be said to have been the predominating motive for the creation of the trust. In short, the trust was a means adopted to save the grantor from her own extravagance. The grantor expressly declared the provisions of the deed to be irrevocable. While admitting that the object of the trust was to so arrange the grantor's property as to relieve it from her indebtedness as it then existed and to maintain her without further inroads into the principal, but without any attempt to answer the force of the provision declaring the trust to be irrevocable, the respondent argues that access to the corpus was available to both the trustee and the grantor. The alleged ability of the trustee and the grantor to use the principal of the trust is relied upon by the respondent for inclusion of the value of the trust property in gross estate under section 302(c) upon the ground that the transfer was intended to">*893 take effect in possession or enjoyment at or after death or under the provisions of section 302(d) because of an alleged reservation of power to alter, amend, or revoke the deed.

The provision of the indenture, quoted in full in our findings of fact, giving the trustee power to "renew existing or future loans whether contracted by the Grantor or by the Trustee" is said by the respondent to clearly evidence such an intention. We can not agree with his construction of the provision when read with the remainder of the instrument, as he agrees it must be, and other evidence of record. The construction urged by the respondent is not only directly contrary to the provision against revocation, but to the predominating motive for the creation of the trust. Obviously, if the grantor had a right to withdraw corpus to pledge as security for loans, she could by such action, in effect, revoke the trust by bringing the loan value within her reach and thus remove from the trust property with which to produce income to pay debts existing at the time of the creation of the trust, and for her support. We said in ">*894 , that:

* * * When the trust instrument was declared to be irrevocable we think that meant irrevocable by any means whatever, whether by a direct revocation or by the exercise of a power reserved under the instrument coupled with the operation of a rule of law such as the rule regarding resulting trusts. * * *

The trust empowers the trustee to apply the proceeds of the sale, pledge, or other disposition of corpus in payment of such debts of the grantor as were set forth in the instrument and to borrow, in its discretion, money for any purpose it deemed proper, including the payment of debts of the grantor listed in the trust or thereafter incurred by the trustee. The right given the trustee to renew future loans is consistent with this power. No provision of the deed expressly ">*209 authorizes the grantor to remove corpus from the trust for sale, pledge, or other disposition. The provision authorizing the trustee to "renew existing or future loans whether contracted by the Grantor or by the Trustee" was inserted in the instrument to obtain the grantor's signature on new loans to replace the bank loans outstanding">*895 at the time the trust was created, for the payment of which a substantial part of the corpus was pledged as security. If, as the respondent contends, the trust provision gave the grantor power to pledge corpus as security for future loans, the deed is ambiguous, for such a right to invade principal would be equivalent to a right to revoke and, therefore, directly opposed to the express trust provision against revocation.

A reservation by the grantor of a right to use corpus would have defeated the purpose for which the trust was created. In 1930 the grantor sought to have the trustee apply some of the corpus to the payment of debts incurred by her since the creation of the trust and was advised by it that the trusteed property could not be used for that purpose. The attorneys who drafted the trust deed concurred in this interpretation of he instrument. No income or principal was ever used by the trustee to pay debts incurred by the grantor after the execution of the trust. The construction thus placed upon the instrument is entitled to weight in determining its intent, ">*896 ; ; , and substantiates the construction we have given the deed.

The respondent erred in including the value of the corpus of the trust in decedent's estate under the provisions of section 302(c) and (d) of the Revenue Act of 1926, as amended. Without the value of the corpus of the trust, decedent's gross estate was less than debts of the estate, which the parties agree are deductible in computing the net estate. It follows that there is no deficiency in estate tax, and no liability on the part of the trustee as a transferee. Accordingly,

Decision will be entered for the petitioners.