Dravo v. Commissioner , 40 B.T.A. 309 ( 1939 )

FANNY M. DRAVO AND FIDELITY TRUST COMPANY, SURVIVING EXECUTORS OF THE WILL OF FRANCIS R. DRAVO, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

JANE M. DRAVO, J. D. BERG, AND L. A. MERTZ, EXECUTORS OF THE WILL OF RALPH M. DRAVO, DECEASED, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Dravo v. Commissioner

Docket Nos. 88094, 89366.

United States Board of Tax Appeals

40 B.T.A. 309; 1939 BTA LEXIS 861;

July 27, 1939, Promulgated

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">*861 1. Where two brothers and their wives, who had separate estates of their own, each executed contemporaneously certain transfers in trust not in contemplation of death, which transfers were irrevocable except as to certain remainder interests created by the trusts, it is held:

(a) None of the parts of the corpora of the trusts which represented life estates irrevocably conveyed to their respective wives are includable in the respective gross estates of the decedents.

(b) The values of remainder interests representing parts of the trusts which were payable to such remaindermen as should be designated by the decedents, where the power to make such designation was still outstanding at the time of death of each decedent, are includable in the gross estates of the decedents.

(c) A remainder interest in the Francis R. Dravo trust as to which settlor reserved the right to designate the employees who were to participate, which designation could be changed and set aside by his brother, who survived him, is not includable in the gross estate of decedent Francis R. Dravo.

(d) The parts of the trusts which were payable to remaindermen named at the time the trusts were created and">*862 as to which no powers were reserved to alter, amend, or revoke, are not includable in the respective gross estates of the decedents.

2. Where one of the decedents reserved a power to designate the recipients of a mere contingent remainder interest in the trust created in him, held, such part of the estate is not includable in his gross estate.

3. Where one of the decedents directed that upon the death of both his wife and himself a remainder interest was to be paid to such charities as he should designate in writing to the trustees, and prior to his death he designated certain charitable organizations to receive the remainder interest and retained at the time of his death the power to redesignate it to charities, held, the value of the remainder interest should be included in his gross estate under section 302(d) of the Revenue Act of 1926 and allowed as a deduction under section 303(a)(3) of the same act.

Wm. S. Moorhead, Esq., and Wm. F. Knox, Esq., for the petitioners.

Harold Allen, Esq., and Lewis T. Matlack, Esq., for the respondent.

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BLACK

">*310 These proceedings, consolidated for hearing, involve deficiencies in">*863 estate tax of $56,474.09 in Docket No. 88094 and $84,230.71 in Docket No. 89366. The principal question at issue is whether any part of the value at death of two certain transfers, one made by the decedent in Docket No. 88094 on January 17, 1931, and one made by the decedent in Docket No. 89366 on January 15, 1931, should be included in the gross estates of the respective settlors under section 302 of the Revenue Act of 1926, and, if so, whether any deduction from the amount or amounts so included is allowable under section 303(a)(3) of the same act. Several other issues were agreed upon in a stipulation which has been filed in each case, effect to which will be given under Rule 50.

FINDINGS OF FACT.

Fanny M. Dravo and the Fidelity Trust Co., petitioners in Docket No. 88094, are the surviving executors of the will of Francis R. Dravo, who died February 26, 1934, a resident of the Commonwealth of Pennsylvania. Jane M. Dravo, J. D. Berg, and L. A. Mertz, petitioners in Docket No. 89366, are the executors of the will of Ralph M. Dravo, who died November 11, 1934, a resident of the Commonwealth of Pennsylvania.

Francis R. Dravo, referred to in some of the instruments hereinafter">*864 mentioned as Frank R. Dravo, and Ralph M. Dravo were brothers. They started in business in Pittsburgh in 1891. Their activities resulted in the formation of the Dravo Contracting Co., Keystone Sand & Supply Co., Dravo-Doyle Co., and Dravo Equipment Co. The activities of these companies included the building of locks, dams, bridge piers, tunnels, subways, dredges, towboats, and other floating equipment and machinery incident thereto, with a fabricating plant at Neville Island near Pittsburgh and a shipyard at Wilmington, Delaware. By 1930 the capital and surplus of the four companies ">*311 amounted to approximately nine to ten million dollars. On October 1, 1930, the Dravo Corporation was organized for the purpose of integrating the efforts of the managerial forces of the four old companies.

At or about the time that the plans for the organization of the Dravo Corporation were being worked out, the two Dravo brothers took up the matter of the formation of four irrevocable trusts - one trust to be executed by each brother and one trust to be executed by the respective wives of the brothers, who each owned a separate estate. The trusts of Francis R. Dravo and his wife, ">*865 Fanny M. Dravo, were both executed simultaneously on January 17, 1931. The trusts of Ralph M. Dravo and his wife, Jane M. Dravo, were both executed simultaneously on January 15, 1931. One of the controlling purposes for the formation of the four trusts was to give the ultimate control of the Dravo Corporation or its constituent companies to the group of men associated with the two Dravo brothers in the development of the business conducted by these concerns.

The Dravo brothers for a great number of years had encouraged the managerial employees of the four companies which were consolidated into the Dravo Corporation to acquire interests in these companies. From time to time they gave stock in these four companies to this group and encouraged them to buy stock therein, which stock so acquired was later exchanged for Dravo Corporation stock.

The total amount of common stock of the Dravo Corporation outstanding on January 15, 1931, prior to the execution of the deeds of trust in question, was 482,154 shares. The common stock holdings on that date of Francis R. Dravo, Fanny M. Dravo, Ralph M. Dravo, and Jane M. Dravo, with the respective percentages of their holdings, were as">*866 follows:

	Shares	Percent
Francis R. Dravo	87,896	18.23
Fanny M. Dravo	74,844	15.52
Ralph M. Dravo	58,049	12.04
Jane M. Dravo	100,848	20.92
Total	321,637	66.71

The holdings of common stock of the Dravo Corporation on January 15, 1931, of the following list of managerial employees of the Dravo Corporation amounted to 18.58 percent and were as follows:

	Shares
J. D. Berg	17,664
W. A. Bliss	2,428
Jos. W. Connell	6,867
Alex. W. Dann	6,146
A. Davia	15,049
V. B. Edwards	12,035
Wm. H. Fowler	4,898
E. T. Gott	9,755
C. A. Hill	300
C. B. Jansen	1,312
L. A. Mertz	977
J. S. Miller	12,177
Total	89,608

">*312 At no time during their respective lives did Francis R. Dravo or Ralph M. Dravo control the Dravo Corporation.

On January 17, 1931, Francis R. Dravo duly executed a deed of trust, which is sometimes hereinafter referred to as the Francis R. Dravo deed, by which he transferred and delivered to the trustees securities then owned by him as follows: $300,000 of 6 percent debentures of the Dravo Corporations; 6,000 shares of 6 percent cumulative preferred stock of the Dravo Corporation, par value $50 a">*867 share; and 50,000 shares of common stock of the Dravo Corporation having no par value. He directed the trustees to manage the trust estate, collect the income therefrom, and pay so much of the net income as they might determine to his wife, Fanny M. Dravo, during her lifetime, the net income not so paid to be accumulated and added to principal. Among other things, article second of the trust, provided:

Section 1. * * *

The Trustees may advance portions of the principal hereof to or for the use or benefit of the Creator's said wife, at such times, in such amounts and for such purposes as the said Trustees in their opinion may deem advisable.

Section 2. After the death of the Creator's wife, Fanny M. Dravo, the Trustees shall divide all the Trust Estate then remaining in their hands into three (3) equal parts designated as Parts "A", "B", and "C". * * *

(a) After the death of the Creator's wife, Fanny M. Dravo, the Trustees shall divide the principal of Part "A" into twelve (12) equal shares, and shall administer and distribute said shares as follows, to-wit: * * *

The income from 8 of the 12 shares was to be paid to the settlor during his life, if he survived his">*868 wife, with remainders to others As to the remaining 4 shares, a certain amount of the principal was to be paid to certain individuals, and the income from the balance to the settlor during his life, if he survived his wife, with remainders to others. Article second, section 2, continued as follows:

(b) After the death of the Creator's wife, Fanny M. Dravo, the Trustees shall pay the net income from Part "B" to the Creator, in convenient installments, for and during the term of his natural life.

Upon the death of both the Creator's wife and the Creator, the Trustees shall divide the principal of Part "B" among such charities, and in such proportions as the creator shall designate in writing to the Trustees. The latest designation of charities which shall be so certified to the Trustees by the Creator before his death shall govern the Trustees in making distribution.

(c) Upon the death of the Creator's wife, Fanny M. Dravo, the Trustees shall divide the principal of Part "C" as follows, to-wit:

Seventy-five per centum (75%) to those officers and employees of the Dravo Corporation or its constituent companies as shall be certified to the Trustees by Ralph M. Dravo and/or Francis">*869 R. Dravo in such proportions as they or either of them shall determine and certify. At any time during the lifetime of Fanny M. Dravo the said Francis R. Dravo and Ralph M. Dravo or either of them may certify a new list of those eligible to distribution hereunder and the Trustees shall be governed by the list nearest in date to the death of the said Fanny M. ">*313 Dravo. In no event shall a list of eligible officers and employees include the Creator. * * * In case any of the certified officers or employees has died while in the employment of any of the aforesaid companies, or after his retirement by reason of such mental or physical disability as in the judgment of the Trustees shall be sufficient cause for such officer or employee discontinuing his service with the Dravo Corporation or any of its constituent companies, his share shall be distributed as he shall by his last Will and Testament direct, or in default of a Will, to his heirs as determined by the intestate laws of Pennsylvania, provided, however, that during the lifetime of Fanny M. Dravo, the said Francis R. Dravo and Ralph M. Dravo, or either of them, may revise said certified list so as to divest any certified">*870 officer or employee or his estate, from the right to participate hereunder.

Twenty-five per centum (25%) thereof to Dravo Management Company to be by it apportioned at one time or from time to time among employees of the Dravo Corporation or any of its constituent companies in such proportions and upon such terms as the Board of Directors of Dravo Management Company shall determine. In case Dravo Management Company be not in existence, the aforesaid twenty-five per centum (25%) of the Trust Estate shall be distributed to Dravo Corporation to be apportioned among its employees in such proportions and upon such terms as its Board of Directors shall determine.

The Dravo Management Co. never came into existence.

The latest designation by Francis R. Dravo of charities to participate in the Francis R. Dravo deed was contained in a letter dated September 30, 1931, duly signed by him and delivered on that date to the then acting trustees. The charities so designated, together with the proportionate share for each charity, were as follows:

Lehigh University, South Bethlehem, Pa	8/10
Valley Hospital, Sewickley, Pa	1/10
St. Barnabas' Free Home, Gibsonia, Pa	1/10

">*871 The three institutions mentioned in the immediately preceding paragraph were at the date of death of Francis R. Dravo, and continue to be, religious, educational, and charitable corporations within the meaning of those terms as used in section 303(a)(3) of the Revenue Act of 1926. A similar list was executed and filed on January 17, 1931.

Contemporaneously with the execution of his deed, Francis R. Dravo executed nd filed with the trustees a list of employees, with their respective percentages, who were to participate under article second, section 2, part "C" of this deed. Prior to his death he changed this list on four different dates. The last list which he filed with the trustees was dated February 20, 1933. Each list concluded with the statement that "This list is made with the understanding that these names and percentages may be changed from time to time by either myself or my brother, R. M. Dravo."

The Francis R. Dravo deed was not made in contemplation of death.

On January 17, 1931, Fanny M. Dravo, wife of Francis R. Dravo, duly executed a deed of trust, which is sometimes hereinafter referred ">*314 to as the Fanny M. Dravo deed, by which she transferred">*872 and delivered to the trustees of her trust securities then owned by her which were identical in kind and amount with those transferred by her husband, Francis, to his trust on the same day.

The Fanny M. Dravo deed was in all substantial respects the same as the Francis R. Dravo deed, except that the relative positions of husband and wife were reversed therein. The trustees were the same in both deeds. The certifications of the 75 percent of part "C" were to be made by "Ralph M. Dravo and/or Francis R. Dravo * * * or either of them * * * during the lifetime of Francis * * *."

The latest designation of officers and employees of Dravo or its constituent companies entitled to participate under paragraph (C) of section 2 of article second of the Fanny M. Dravo deed was contained in a letter from Francis R. Dravo to the then acting trustees dated February 20, 1933, duly signed by him and delivered on that date.

On January 15, 1931, Ralph M. Dravo duly executed his deed of trust, which is sometimes hereinafter referred to as the Ralph M. Dravo deed, by which he transferred and delivered to the trustees securities then owned by him as follows: $300,000 of 6 percent debentures of">*873 the Dravo Corporation; 7,000 shares of 6 percent cumulative preferred stock of the Dravo Corporation, par value $50 a share; and 50,000 shares of common stock of the Dravo Corporation having no par value. He directed the trustees to manage the trust estate, collect the income therefrom, and pay so much of the net income as they might determine to his wife, Jane M. Dravo, during her lifetime, the net income not so paid to be accumulated and added to the principal. Among other things, article second of the trust provided:

Section 1. * * *

The Trustees may advance portions of the principal hereof to or for the use or benefit of the Creator's said wife, at such time, in such amounts and for such purposes as the said Trustees in their opinion may deem advisable.

Section 2. After the death of the Creator's wife, Jane M. Dravo, the Trustees shall pay the sum of Five Thousand Dollars ($5,000.00) to Creator's nephew, Frank Pettit, if he is then living, and shall distribute one-third (1/3) of all the stock of the Dravo Management Company and one-third (1/3) of all the common stock of the Dravo Corporation then remaining in the hands of the Trustees, not however, to exceed fifteen">*874 per centum (15%) of the value, as determined by the Trustees, of the total Trust Estate then in the hands of the Trustees, to and among those officers and employees of the Dravo Corporation or any of its constituent companies as shall be certified to the Trustees by Ralph M. Dravo and/or Frank R. Dravo in the proportions which they or either of them shall determine and certify. At any time during the lifetime of Jane M. Dravo the list of officers and employees entitled to share hereunder and their respective proportions may be changed at the discretion of Ralph M. Dravo and/or Frank R. Dravo and the Trustees shall be governed by the list of eligible officers and directors certified to the Trustees at the nearest date to the ">*315 death of Jane M. Dravo. In no event shall the list of eligible officers and employees include the Creator. * * *

Section 3. After the death of the Creator's wife, Jane M. Dravo, and after the payments from principal specified in the preceding section, the Trustees shall pay so much of the net income from the remaining Trust Estate as the Trustees shall determine in quarterly installments to the Creator, Ralph M. Dravo, for and during the full">*875 term of his natural life. So much of the net income as is not paid to the Creator shall be accumulated and added to the principal of the Trust.

Section 4. After the death of the Creator's wife, Jane M. Dravo, and the Creator, Ralph M. Dravo, one-half (1/2) of all the stock of the Dravo Management Company and one-half (1/2) of all the common stock of the Dravo Corporation then remaining in the hands of the Trustees, not, however, to exceed twenty per centum (20%) of the value, as determined by the Trustees, of the total Trust Estate then in the hands of the Trustees shall be distributed by the Trustees as follows: * * *

The distribution to be made here was identically the same as provided for in the Francis R. Dravo deed, article second, section 2(c), except that a new list could be made by Ralph M. Dravo and Frank R. Dravo or either of them at any time during the lifetime of Ralph or Jane, and the list nearest in date to the death of the survivor of Ralph and Jane would govern.

The Ralph M. Dravo deed in article second, section 5, provided that the balance of the trust estate should be held in trust and $20,000 paid yearly therefrom to Elizabeth Dravo Harlow, settlor's">*876 daughter, for life and, if income is sufficient, to pay annuities of $100 per month to Lucy Moore for life, $50 per month to Alice McClure for life, $100 per month to Dorothy Dravo for life, and $50 per month each to Elizabeth Patterson and Ollie Patterson for life. After the deaths of Jane M. Dravo, Ralph M. Dravo, and Elizabeth Dravo Harlow, the trustees were directed, under article second, section 6, to pay the trust estate then on hand, subject to the annuities above mentioned, to the issue or lineal descendants of Elizabeth Dravo Harlow, but, if she should die without issue or lineal descendants, then under article second, section 7, to pay the income, subject to the annuities above mentioned, to Francis R. Dravo during his lifetime, and, upon his death, under article second, section 8, to distribute the balance of the stock of the Dravo Management Co. and the Dravo Corporation common stock, not to exceed one-half of the value of the trust estate then in the hands of the trustees, to those officers and employees of the Dravo Corporation in the same manner as provided for in the Francis R. Dravo deed, article second, section 2(c), except that a new list could be made during the">*877 lifetime of Ralph or Francis, and the list nearest in date to the death of the survivor of Ralph or Francis would govern.

">*316 Article second, section 8, then concluded as follows:

All the balance of the Trust Estate shall be distributed by the Trustees to such charities and in such proportions as the Creator shall designate in writing to the Trustees. The latest designation of charities which shall be so certified to the Trustees by the Creator before his death, shall govern the Trustees in making distribution.

The latest designation by Ralph of charities entitled to participate in the Ralph M. Dravo deed under article second, section 8, thereof was contained in his letter dated November 24, 1931, duly signed by him and delivered to the then acting trustees. The charities so designated, together with the proportionate share for each charity, were as follows:

	Percent
Lehigh University, Bethlehem, Pa	40
St. Stephen's P.E. Church, Sewickley, Pa	20
St. Barnabas' Free Home, Gibsonia, Pa	20
Valley Hospital, Sewickley, Pa	20

The four institutions mentioned in the immediately preceding paragraph were at the date of the death of Ralph, and continue">*878 to be, religious, educational, and charitable corporations within the meaning of those words as used in section 303(a)(3) of the Revenue Act of 1926.

The Ralph M. Dravo deed was not made in contemplation of death.

On January 15, 1931, Jane M. Dravo duly executed her deed of trust, which is sometimes hereinafter referred to as the Jane M. Dravo deed, by which she transferred and delivered to the trustees securities then owned by her which were identical in kind and amount with those transferred by Ralph to his trust.

The Jane M. Dravo deed was in all substantial respects the same as the Ralph M. Dravo deed, except that the relative positions of husband and wife were reversed therein. The trustees were the same in all four deeds, namely, Francis R. Dravo, Ralph M. Dravo, and the Bank of Pittsburgh National Association. The bank was closed by the Comptroller of the Currency on September 21, 1931, and by letter dated October 20, 1931, the bank, through its receiver, resigned as trustee under all of the four trusts. The present trustees of all four trusts are Louis A Mertz and J. D. Berg.

Article first, section 4, of all four trust deeds contained a provision as follows:

">*879 * * * So far as is practical, the Trustees shall make distribution to the employees of the Dravo Corporation or subsidiary companies who are beneficiaries hereunder, in the stock of Dravo Management Company if it be in existence, otherwise in the common stock of Dravo Corporation.

The latest designation of officers and employees of the Dravo Corporation or its constituent companies entitled to participate under the Francis R. Dravo deed, the Ralph M. Dravo deed, and the Jane ">*317 M. Dravo deed was contained in separate letters dated April 4, 1934, from Ralph M. Dravo to the then acting trustees of each trust, duly signed by him and delivered on that date to the then acting trustees of each of the three trusts. The names of those entitled to participate, together with their respective percentages, were as follows:

	Percent
J. D. Berg	14
J. S. Miller	14
V. B. Edwards	14
Wm. H. Fowler	10
L. A. Mertz	7
A. Davia	8
C. A. Hill	5
W. A. Bliss	6
Alex. W. Dann	10
E. T. Gott	4
C. B. Jansen	4
Jos. W. Connell	4

Francis was survived by his wife, Fanny, who is still living. He was also survived by the officers and employees of the Dravo Corporation">*880 named in the designation letter of Ralph, dated April 4, 1934, all of whom are still living and in the employ of the Dravo Corporation except Connell, who died in October 1936, while still in the employ of the Dravo Corporation.

At the date of death of Francis the value of the remainder interest of the charities entitled to receive part "B" in the Francis R. Dravo deed was not in excess of $86,922; and the value of the remainder interest of the employees designated to receive 75 percent of part "C" was not in excess of $65,191.

Fanny M. Dravo was born December 1, 1868. Jane M. Dravo was born April 7, 1868. Elizabeth Dravo Harlow was born September 24, 1895. Lucy Moore was born August 27, 1861. Alice McClure was born April 7, 1880. Dorothy Dravo was born March 23, 1894. Ollie Patterson was born December 24, 1869.

No portion of the corpus deposited under the Francis R. Dravo deed or the Ralph M. Dravo deed has been distributed by the trustees.

No portion of the corpus deposited under the Fanny M. Dravo deed has been distributed by the trustees except that, upon the death of Francis, the trustees distributed part "C" as follows: 75 percent to those officers and employees">*881 specified in the designation letter of Francis dated February 20, 1933, and 25 percent to the Dravo Corporation in accordance with article second, section 2(c), of the Fanny M. Dravo deed. Included in the distribution to the Dravo Corporation were 12,500 shares of Dravo Corporation common stock and included in the distribution to the officers and employees were 37,500 shares of Dravo Corporation common stock.

No portion of the corpus deposited under the Jane M. Dravo deed has been distributed by the trustees except that, upon the death of Ralph, the trustees paid $5,000 to Frank Pettit and distributed to the officers and employees specified in the designation letter of Ralph dated April 4, 1934, 16,667 shares of Dravo Corporation common stock.

">*318 The respondent, in determining the deficiency in Docket No. 88094, has included as part of the gross estate of the decedent Francis R. Dravo under section 302(c) of the Revenue Act of 1926, as amended, at the values stated below, the entire property transferred by the decedent under his deed of trust dated January 17, 1931, as follows:

$300,000 of 6 percent debentures of the Dravo Corporation	$225,000
6,000 shares of 6 percent cumulative preferred stock of the Dravo Corporation	120,000
50,000 shares of common stock of the Dravo Corporation	50,000
Total value included in gross estate	395,000

">*882 The value at which the above securities were included in the decedent's gross estate in Docket No. 88094 was the fair market value of such securities at the date of the death of Francis R. Dravo.

In a statement attached to the deficiency notice in Docket No. 88094 the respondent, among other things, said:

No deduction for charity is made in respect to the value of the trust property included in the gross estate under transfers in view of the power to invade the corpus of the trust under the provisions of paragraph 2 of Section 1 of Article Second. It can not, therefore, be presently determined what amount, if any, will pass to charity under the trust agreement.

Ralph was survived by his wife, Jane, by his daughter Elizabeth, by Lucy Moore, Alice McClure, Dorothy Dravo, and Ollie Patterson, and by all the officers and employees mentioned in his letter of designation dated April 4, 1934. All of these persons are now living except Ollie Patterson, who died on January 3, 1935, and Connell, who died as previously stated herein. Elizabeth Dravo Harlow was at the time of the making of the Ralph M. Dravo deed and is now the wife of Bruce Harlow. Both she and her husband are now">*883 living but have no issue. Elizabeth Patterson died January 12, 1934.

At the date of death of Ralph the value of the remainder interest in the common stock of the Dravo Corporation distributable under his deed after the death of Jane and Ralph to the employees designated by Ralph by his letter dated April 4, 1934, was not in excess of $19,949.

At the date of death of Ralph the value of the remainder interest, if any, in the common stock of the Dravo Corporation distributable under his deed after the death of Ralph and Jane Dravo and Elizabeth Dravo Harlow to employees designated by Ralph by his letter dated April 4, 1934, if Elizabeth should die without issue, was not in excess of $2,378.

At the date of death of Ralph the value of the remainder interest, if any, in the Ralph M. Dravo deed corpus distributable under his deed after the deaths of Ralph and Jane Dravo and Elizabeth Dravo Harlow to the charities designated by Ralph by his letter dated November ">*319 24, 1931, if Elizabeth should die without issue, was not in excess of $69,711.

The respondent, in determining the deficiency in Docket No. 89366, has included as part of the gross estate of decedent Ralph M. ">*884 Dravo under section 302(c) and (d) of the Revenue Act of 1926, as amended, at the values below stated, the entire property transferred by the decedent under his deed of trust dated January 15, 1931, as follows:

$300,000 of 6 percent debentures of the Dravo Corporation	$225,000
7,000 shares of 6 percent cumulative preferred stock of the Dravo Corporation	140,000
50,000 shares of common stock of the Dravo Corporation	50,000
Total value included in gross estate	415,000

The value at which the above securities were included in the decedent's gross estate in Docket No. 89366 was the fair market value of such securities at the date of the death of Ralph.

The respondent, in determining the deficiency in Docket No. 89366, did not allow any deduction for charity in connection with the provision contained in article second, section 8, of the Ralph M. Dravo deed.

OPINION.

BLACK: In Docket No. 88094 the respondent, under subdivision (c) of section 302 of the Revenue Act of 1926, as amended, included $395,000 in the decedent's gross estate as a result of the transfer in trust made by Francis R. Dravo on January 17, 1931. In Docket No. 89366 the respondent, under">*885 subdivisions (c) and (d) of the same act, included $415,000 as a result of the transfer made by Ralph M. Dravo on January 15, 1931. In neither case has the respondent allowed any deduction under section 303(a)(3) from the amounts thus included under sectin 302. Petitioners contend that no amount should have been so included under section 302 except the value of certain remainder interests of the Ralph M. Dravo trust and that, should any part payable to such charities as the respective settlors shall designate be held to be includable under section 302, then petitioners are entitled to a deduction in the same amount under section 303(a)(3). First, we shall consider to what extent, if at all, the respective transfers are includable in the gross estates of the respective decedents.

At the time the two trusts were created in January 1931, the material provisions of section 302 of the Revenue Act of 1926 were as follows:

SEC. 302. 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 -

* * *

(c) ">*320 To the extent of any interest therein">*886 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. * * *

In applying subdivision (c) in his respective determinations, the respondent applied it not as it was originally enacted, but as it was later amended by Joint Resolution of March 3, 1931, Public 131, Seventy-first Congress, and by section 803(a) of the Revenue Act of 1932. At the hearing the parties stipulated that neither of the transfers in question was made in contemplation of death. ">*887 In so stipulating, the respondent, in each proceeding, reserved the right to contend for the application of subdivision (c), not as it was originally enacted in section 302, supra, but as it was later amended. It is now settled that these amendments to subdivision (c) apply only to transfers made after the dates of their respective adoption. . They do not apply here. Subdivision (d) has been amended by section 401 of the Revenue Act of 1934 and by section 805 of the Revenue Act of 1936. The latter amendment is not applicable here, and the former amendment to the extent that it might be applicable is not material. The material provisions of the applicable statute are therefore subdivisions (c) and (d) of section 302 of the Revenue Act of 1926, supra, as they existed at the time the trusts in question were created.

In the statements attached to the deficiency notices the respondent gives two principal reasons for including the corpora of the two trusts of Francis and Ralph in their respective gross estates. The first is that the trusts were made in contemplation of death. Since it has been stipulated that such was not">*888 the fact, the respondent's first reason requires no further discussion. The second principal reason is that, due to the simultaneous trusts created by Fanny and Jane, each decedent in effect retained during his lifetime the income from the property he transferred, and that such a retention of income brings his transfer within section 302(c) of the Revenue Act of 1926, as amended by section 803(a) of the Revenue Act of 1932. As pointed out in the previous paragraph, the amendments to subdivision (c) are not applicable here because of the fact that the trusts were created prior to March 3, 1931. The retention or nonretention of income by the decedents in these proceedings is not ">*321 a deciding factor. . Therefore, assuming without deciding that the fact that Francis was made the life beneficiary of the trust created by his wife, Fanny, was equivalent under the circumstances to a reservation by Francis in his own trust of the income for life and that the same situation existed as to Ralph M. Dravo, such facts would not enable the Commissioner to prevail. ">*889 In the statement attached to the deficiency notice in Docket No. 89366 the respondent gives an additional reason for including a part of the corpus of Ralph's trust in his gross estate. He says:

On the death of decedent and wife one-half of the common stock of the Dravo Corporation, however, not to exceed 20 percent of the total trust estate, is to be distributed to employees of the Dravo Corporation, 75 per cent of which is to go to the officers and employees certified to the trustees. Frank R. Dravo, decedent's brother, predeceased decedent, therefore, from the date of the brother's death up until the time of decedent's death the decedent alone possessed the power to shift the economic benefit of the remainder interest amongst the employees due to the power the decedent had to certify who should share in the remainder interest. The cessation of this power brings this portion of the trust principal under Section 302(d) of the Revenue Act of 1926.

If the remaining part of the corpus of Ralph's trust and all or any part of the corpus of Francis' trust are to be included in their respective gross estates, it must be for reasons other">*890 than those contained in the deficiency notices. Cf. . Petitioners contend that, with the possible exception of that part of the corpus of Ralph's trust which went to those officers and employees of the Dravo Corporation as might be certified by Ralph alone after the death of his brother Francis and prior to the death of his wife, Jane, no part of the corpus of either trust is includable under either subdivision (c) or (d) of section 302, supra.Probably due to the death of respondent's counsel, Harold Allen, no brief has been filed on behalf of the respondent.

Is any part of the corpora of the Francis R. Dravo trust and the Ralph M. Dravo trust includable in the respective gross estates of the decedents by reason of the provision contained in article second, section 1, of all four trusts, whereby the trustees could in their discretion advance portions of the principal of the wife's trust to her husband and vice versa? In , we said:

It can not be questioned that the decedent gave to his brother, Allan S. Lehman, the right to receive the income for life of the">*891 two trust estates created by him and a right to withdraw $150,000 from the principal of the trust estate during his life or until December 31, 1935, in exchange for similar rights of the decedent in the trust estates created by Allan. Up to the date of his death the decedent had the power to bring into his own estate $150,000 of the corpora of the trusts created by Allan. The right to make this withdrawal out of the reciprocal trusts ">*322 created by Allan was the equivalent of a right in the decedent to withdraw that amount from the trust estates which he had created. This right had a value at the time of decedent's death of $150,000. It was an interest in property "which ceased by reason of the death." Edwards v. Slocum, supra. We are of the opinion that the respondent did not err in including the $150,000 in the gross estate of the decedent.

We do not think we have the same situation here as we had in the Lehman case. There the decedent gave his brother Allan the absolute and unconditional right to withdraw the $150,000 in exchange for similar rights of the decedent in the trust created by Allan. No such absolute and unconditional rights are present in">*892 the instant proceedings. Neither of the decedents here could withdraw any of the principal of his wife's trust at his pleasure, nor could either wife withdraw any of the principal of her husband's trust at her pleasure. Neither Francis nor Ralph ever received any part of the principal deposited under the deeds of their respective wives. Any payment of principal under article second, section 1, of any of the four trusts could be made only in discretion of the trustees, and if they abused this discretion they would render themselves liable to any remainderman whose interest would thereby be adversely affected. Cf. . We hold that no part of the corpora of the four trusts is includable in the respective gross estates of the decedents by reason of the provision contained in article second, section 1, of all four trusts whereby the trustees could in their discretion advance portions of the principal of the wife's trust to her husband and vice versa.

Is any part of the corpus of the Francis R. Dravo deed includable in the gross estate of Francis upon any ground? That part representing the life estate in his wife, Fanny, took effect">*893 in possession and enjoyment at the time of the creation of the trust and no power was reserved to alter, amend, or revoke this life estate. It is not includable in the decedent's gross estate. . The trust deed provided that upon the death of Fanny the remainder was to be divided into three equal parts, designated as parts "A", "B", and "C". All of the remainder interests designated as part "A" vested completely at the time of the creation of the trust, with no power reserved to alter, amend, or revoke, and should not be included in the gross estate. In , we had this identical trust deed before us in connection with the Commissioner's determination that certain income of the trust was taxable to Francis for the year 1931 under section 167 of the Revenue Act of 1928 rather than to the Francis R. Dravo trust. In the course of our opinion we said:

* * * The disposition to be made of parts "A" and "B" shows clearly that none of the corpus of those parts, and consequently, no portion of the accumulated">*894 ">*323 income included thereon, was distributable to Francis R. Dravo, nor could any action of his change the conditions of the trust so as to make such corpus distributable to him.

Although it may well be that no action of Francis could change the conditions of the trust so as to make part "B" distributable to him, yet upon the death of both Fanny and Francis, the trustees were to divide the principal of part "B" among such charities as designated in the latest designation certified to the trustees by Francis before his death. We think that the enjoyment of all of part "B" was subject at the date of Francis' death to a change through the exercise of a power by Francis alone to alter or amend, and that all of this remainder interest should be included in decedent's gross estate under section 302(d), supra. Cf. , the leading case with respect to section 302(d). The parties have stipulated that the value of this remainder interest at the date of death of Francis was "not in excess of $86,922." This remainder interest is a part of the entire fee which the respondent included at a value of $395,000. Petitioners do">*895 not claim nor have they shown that the value of this remainder interest was any less than the amount of $86,922. In view of these circumstances, we hold that the amount of $86,922 should be included in the decedent's gross estate in Docket No. 88094. Whether the entire amount thus included or any part thereof is deductible under section 303(a)(3) of the Revenue Act of 1926 is an issue to be considered later in this opinion.

As to the 75 percent of part "C" which went to those officers and employees of the Dravo companies "as shall be certified to the Trustees by Ralph M. Dravo and/or Francis R. Dravo * * * At any time during the lifetime of Fanny M. Dravo", we do not think anything should be included in decedent's gross estate. It has been stipulated that the value of the remainder interest of the employees designated to receive 75 percent of part "C" was not in excess of $65,191.

While it is true that Francis had the right to file with the trustees up to the very moment of his death a list of the employees who were to participate under part "C" of his trust and alter, amend, or revoke the proportion which each was to receive, any designation which he might make under this">*896 reserved power was by no means final and conclusive as it was in the designation of charities under part "B" discussed above. It the power of designation to be made by Francis had been final and conclusive as to the 75 percent of part "C", then undoubtedly , would govern. In that case, the Supreme Court, among other things, said:

But the reservation here may not be ignored for, while subject to the specified limitation, it made the settlor dominant in respect of other dispositions of both corpus and income. His death terminated that control, ended the possibility of any change by him, and was, in respect of title to the property in ">*324 question, the source of valuable assurance passing from the dead to the living. That is the event on which Congress based the inclusion of property so transferred in the gross estate as a step in the calculation to ascertain the amount of what in Sect. 301 is called the net estate. Thus was reached what it reasonably might deem a substitute for testamentary disposition.

But in the instant case, the right of Francis of file with the trustees at any time before his death an altered, ">*897 amended, or revised list of the employees who were to participate in 75 percent of part "C", was not final and conclusive. He was not "dominant in respect of other dispositions of both corpus and income", as said in the Porter case. Any alterations or amendments or revisions which Francis might make in the employees' list might be completely changed after his death by his brother Ralph, who survived him. In view of these circumstances, it seems plain that the death of decedent, Francis, was not the source of valuable assurance of title passing from the dead to the living, for the reason that what he had done was subject to revision and was actually revised by Ralph M. Dravo after Francis' death. Cf. . In the instant case, the power of Francis to control the ultimate disposition of the interest in question was entirely dependent upon whether he survived his brother, Ralph, an occurrence, as in the St. Louis Union Trust Co. case, which was entirely fortuitous so far as any control, design, or volition on his part was concerned. As in the St. Louis Union Trust Co. case, the death of Francis passed">*898 no interest to any of the beneficiaries of the remainder interest of 75 percent of part "C." Cf. . On this issue involved in Docket No. 88094, we hold for the petitioner.

The case of , in which we held that the income from part "C" was taxable to the settlor in 1931, while involving the same trust as here considered, is distinguishable because the section of the statute there involved was section 167 of the Revenue Act of 1928, involving "income for benefit of grantor"; whereas the section of the statute here involved is section 302(d), involving estate tax.

As to the 25 percent of part "C" which went to the Dravo Management Co., if in existence, and, if not, to the Dravo Corporation, to be apportioned among the employees of either company, respectively, in such proportions and upon such terms as the respective board of directors should determine, we held in , that, since "control by decedent of either or both of these corporations" was not contradicted, the income from this remaining 25 percent of part "C" ">*899 should be taxed to the decedent for the same reason as was given for taxing the income from the 75 percent to the decedent. It has been stipulated in these proceedings that the ">*325 Dravo Management Co. never came into existence and that at no time during their respective lives did Francis or Ralph control the Dravo corporation. In view of this stipulation we are of the opinion and hold accordingly that the remainder interest represented by this 25 percent of part "C" took effect in possession and enjoyment at the time of the creation of the trust, with no power reserved to alter, amend, or revoke by either Francis R. Dravo or Ralph M. Dravo, and that it should not, therefore, be included in Francis' gross estate.

Is any part of the corpus of the Ralph M. Dravo deed includable in Ralph's gross estate upon any ground?

For the same reasons as given in the case of Francis above, we hold that the life estate in Ralph's wife, Jane, the $5,000 remainder interest payable to Frank Pettit, 25 percent of the remainder interest specified in article second, section 4, of the trust deed, and all of the remainder interests">*900 specified in article second, sections 5, 6 and 7, of the trust deed should not be included in Ralph's gross estate. On the other hand, we hold that the value at date of death of Ralph of the remainder interest mentioned in article second, section 2, of the trust deed which was distributable to officers and employees of the Dravo Corporation and the value at date of death of Ralph of 75 percent of the remainder interest specified in article second, section 4, of the trust deed, should be included in the decedent's gross estate. It has been stipulated that the total value of the remainder interests referred to in the preceding sentence at the date of death of Ralph was "not in excess of $19,949." These remainder interests are a part of the entire fee which the respondent included at a value of $415,000. Petitioners do not claim nor have they shown that the value of these remainder interests was any less than the amount of $19,949. In view of these circumstances, we hold that the amount of $19,949 should be included in the decedent's gross estate in Docket No. 89366.

This is a different holding from that which we made as to the remainder interest of the employees in 75 percent">*901 of part "C" in the Francis R. Dravo trust. The reason for this different holding is that the situations are fundamentally different. At the time of the death of Ralph, Francis was dead and therefore, there was no one but Ralph himself who had the power to alter, amend, or revise the list of employees who were to participate in the remainder interest of this part of the Ralph M. Dravo trust. This right to alter, amend, or revise was absolute and "dominant" in Ralph as to 29,167 shares of Dravo Corporation stock at the time of his death and ceased by reason of his death. This, we think, makes the case of , clearly applicable. We understand petitioners' brief to concede as much. But petitioners do not make the same ">*326 concession with reference to the remainder interest covered by section 8 of article 2 of the Ralph M. Dravo trust. Petitioners contend that nothing is to be included in decedent's gross estate as to this contingent remainder interest. On this point, we agree with petitioners.

The provisions of article second, section 8, of the Ralph M. Dravo deed, without repeating them in detail, are provisions which">*902 relate to a mere contingent remainder where decedent at the time of his death retained the right to designate the employees and the charities who were to receive the remainder interest in the event that Elizabeth Dravo Harlow died without issue. Whether Elizabeth would die without issue could not be foreseen at the time of decedent's death. Nothing, we think, is required to be included in the decedent's gross estate by reason of these provisions. ;; ;.

The only matter left for decision is whether the respondent erred in refusing to allow any deduction in Docket No. 88094, under section 303(a)(3) of the Revenue Act of 1926, as amended by section 807 of the Revenue Act of 1932, by reason of article second, section 2(b), of the Francis R. Dravo deed. The material provisions of the applicable statute, as amended, are:

SEC. 303. For the purpose of the tax the value of the net estate shall be determined -

(a) In the">*903 case of a resident, by deducting from the value of the gross estate -

* * *

(3) The amount of all bequests, legacies, devises, or transfers * * * to or for the use of any corporation organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes * * *. If the tax imposed by section 301, or any estate, succession, legacy, or inheritance taxes, are, either by the terms of the will, by the law of the jurisdiction under which the estate is administered, or by the law of the jurisdiction imposing the particular tax, payable in whole or in part out of the bequests, legacies, or devices otherwise deductible under this paragraph, then the amount deductible under this paragraph shall be the amount of such bequests, legacies, or devises reduced by the amount of such taxes. The amount of the deduction under this paragraph for any transfer shall not exceed the value of the transferred property required to be included in the gross estate; and * * *. [Matter in italics was added by section 807 of the Revenue Act of 1932.]

On the same day that Francis created his trust and again on September 30, 1931, he, by virtue of article second, section">*904 2(b), designated Lehigh University, Valley Hospital, and St. Barnabas' Free Home as the charities entitled to receive part "B" of the remainder after the death of himself and his wife. The parties have stipulated that these organizations were at the date of death of Francis and continue to be such charitable organizations as are referred to in section ">*327 303(a)(3), supra. The reason for the respondent's refusal to allow any deduction for charities on account of the remainder designated as part "B" was due to that part of article second, section 1, of the trust deed which provided:

The Trustees may advance portions of the principal hereof to or for the use or benefit of the Creator's said wife, at such times, in such amounts and for such purposes as the said Trustees in their opinion may deem advisable.

The respondent contends that by reason of the above quoted provision it is impossible to determine what amount, if any, will pass to charity under the trust deed. The parties, however, have stipulated that at the date of death of Francis the value of the remainder interest, if any, of the charities entitled to receive part "B" in the Francis R. Dravo deed was not">*905 in excess of $86,922. We have hald that this amount should be included in the decedent's gross estate under section 302(d) on account of the power reserved by Francis to change the list of charities, which power was "dominant" in him at the time of his death. In their brief petitioners argue in part as follows:

The Commissioner, as we have said, refuses to allow the deduction to charities on account of the possibility that the remainder interest may be depleted by payments of principal out of the trust fund. If that position is correct, it is manifest that the remainder interest, over which Francis R. Dravo had the right to designate to charities, was subject to diminution by the possibility of payments out of principal. It is said by the Commissioner that the value of the charitable deduction is uncertain on account of the possibility of payments out of principal. We say the same argument applies to the value of the remainder interest to be included in the gross estate. The question, however, is of no importance because whatever is included in the gross estate, as the value of the interest over which Francis R. Dravo had the power to appoint to charities, must of necessity">*906 be the value of the interest which goes to charities; that is to say, the amount of the charitable deduction.

We think this argument is sound and we hold that petitioners in Docket No. 88094 are entitled to a deduction for the charities designated by Francis prior to his death in the amount of $86,922, reduced by the amount of such taxes referred to in section 807 of the Revenue Act of 1932 as may be payable in whole or in part out of the bequests so designated. Cf. ; and . There is a line of cases - , as an example - which hold that, where a trustee under a will has power to distribute corpus to a life beneficiary of the will with remainder to charity, a deduction for charity will not be allowed. These cases are distinguishable, we think, from the instant case in that in such cases there is no question as to the value of the property to be included in the gross estate, to wit, the entire value of the property of the decedent at the date of his death, whereas, in the instant case only the">*907 value of the remainder interest can in any event be included and ">*328 whatever that remainder is (in this instance $86,922) goes to charity. And whatever definitely goes to charity is deductible under section 303(a)(3). The parties have stipulated that "If the Board should be of the opinion that any deduction for charities, allowable to the Francis R. Dravo Estate, is subject to deduction for a proportionate part of Federal estate tax the amount of said deduction will be agreed upon between counsel at the time of settlement under Rule 50." Since petitioners have not made any contention that the deduction for charities should not be so reduced, we assume that the parties are in agreement as to this point.

Reviewed by the Board.

Decisions will be entered under Rule 50.