Estate of Lloyd v. Commissioner ( 1942 )

ESTATE OF HORATIO GATES LLOYD, DECEASED, H. GATES LLOYD, JR., RICHARD W. LLOYD, AND CHARLES D. DICKEY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Estate of Lloyd v. Commissioner

Docket No. 107397.

United States Board of Tax Appeals

47 B.T.A. 349; 1942 BTA LEXIS 704;

July 16, 1942, Promulgated

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Decedent made inter vivos gifts to two trusts for the benefit of his sons. He reserved the right in each trust to modify, amend, or declare new trusts respecting the settlements made but not to revoke the trusts, in whole or in part. Later he amended each trust so that the sons each received life estates in the trust income and power to appoint, by will, remaindermen to receive the trust corpus, in each trust. If the sons failed to exercise the general power of appointment the corpus of each trust was to pass to each son's wife, or descendants, or both. If a son died prior to decedent, leaving no wife or children and without having exercised the power of appointment, the corpus of the particular trust was to revert to the decedent or his legal representatives. Held, under the rule of Day v. Commissioner, 92 Fed.(2d) 179 (C.C.A., 3d Cir. - to which this proceeding may be appealed), decedent's power to modify, amend, or declare new trusts, being indistinguishable from the power which was exercised in the Day case, was a power which once exercised was exhausted, and, therefore, the value of the properties transferred inter vivos to each trust is not includable in the value of the decedent's gross estate under section 302(d) of the Revenue Act of 1926, as amended; held, further, that, under the rule of Helvering v. Hallock,309 U.S. 106">309 U.S. 106, parts of the values of each trust corpus are includable in the value of the decedent's gross estate under section 302(c) of the Revenue Act of 1926, as amended, because of the possibility of reverter to the decedent in each trust, the values of the life estates of each son to be excluded from the value of the gross estate, as adjusted under section 302(j)(2) of the Revenue Act of 1926, as amended, in accordance with article 11 of Regulations 80 (1937 Ed.).

Calvin H. Rankin, Esq., Philip Wallis, Esq., and Frederick E. S. Morrision, Esq., for the petitioners.

Eugene G. Smith, Esq., for the respondent.

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HARRON

Respondent determined a deficiency of $301,517.26 in the petitioners' estate tax liability. Respondent determined that the value of the trust property contained in two inter vivos trusts created by the decedent was properly includable in the decedent's gross estate on the ground that decedent at the time of his death retained the right to modify and amend the trusts or to declare new ones, and also retained a possibility of reverter. Petitioners contend that respondent erred in his determination. The parties agree that income in the amount of $31,315.43 was erroneously included in the gross estate, that amount being income received by the estate during the period between the date of death and the dates of valuation of the assets. Petitioner claims, further, that the estate tax has been overpaid in the amount of $7,077.80.

Part of the facts are stipulated and are found as stipulated. Other facts are adduced from the exhibits and from the record made at the hearing.

The estate tax return was filed with the collector for the first district of Pennsylvania.

FINDINGS OF FACT.

Petitioners are the duly qualified executors of the last will and testament of Horatio Gates Lloyd, hereinafter referred to as decedent, who died testate on January 21, 1937. At the time of his death the decedent was a resident of and was domiciled in Haverford, Pennsylvania.

On April 2, 1919, the decedent executed a written trust indenture, known as the "Richard W. Lloyd (Son) Trust," whereby he agreed to and did transfer to Mary Wingate Lloyd, his wife, a resident of Pennsylvania, as trustee, certain securities in trust to accumulate the income until his son Richard W. Lloyd reached the age of twenty-five, and thereafter to pay him the income. When his son reached the age of thirty, one-half of the trust, the principal, and accumulated income was to be paid over to him, and when he reached the age of thirty-five the remainder of the trust fund was to be paid over to him. The trust agreement gave the son Richard W. Lloyd a power of appointment by will over the trust estate in favor of the son's wife to the extent of income, and in favor of the son's surviving issue without any limitation. But if the son did not exercise the power of appointment, either in whole or in part, or died unmarried before attaining the age of thirty-five, without leaving surviving issue, the principal of the trust fund was to revert to the decedent, if living, and if the decedent was not then living, then income and principal were to be paid to the persons then living who were in receipt of the income and principal of the decedent's residuary estate, in accordance with the provisions of the decedent's will. In the trust instrument decedent expressly reserved to himself the following powers:

To name by deed of appointment under my hand and seal a succeeding trustee, in the event of the death, resignation, or inability to serve, of the said Mary Wingate Lloyd, prior to the execution of the trust. * * *

To approve all changes in the investment or reinvestment.

To modify, amend, or declare new trusts respecting the settlements hereinabove made, but not to revoke the same in whole or in part.

On the same date decedent created another trust, known as the "Horatio G. Lloyd (Son) Trust", which was identical in every respect with the provisions of the Richard W. Lloyd trust, except that it was for the benefit of decedent's son H. Gates Lloyd, Jr., and his wife and issue.

On December 27, 1926, the decedent executed an instrument modifying the terms of the Richard W. Lloyd trust. This instrument contained the following introdductory clauses:

WHEREAS, under the terms of a certain Deed given and executed by me on April 2, 1919, to Mary Wingate Lloyd, IN TRUST for my son, Richard W. Lloyd, I reserved the right to modify, amend or declare new trusts respecting the settlement therein made but not to revoke the same in whole or in part; and

WHEREAS, it is my intention to modify the provisions of said Deed so that my said son shall immediately receive the benefit of the income from the fund held thereunder and that the corpus thereof shall be held for the term of his life with certain remainders over as hereinafter recited;

Now, THEREFORE, in exercise of the power in me so vested, I substitute the following for the dispositive clauses contained in said Deed by way of modification thereof and now declare that from the date of the execution hereof the said fund shall be held by the Trustee upon the trusts following: viz.

The instrument then provided that the income collected from the trust during 1926, and thereafter was to be paid to his son Richard W. Lloyd for life, and at his death the corpus, together with any accumulations of income, should be subject to the son's general power of appointment by will, but if the son failed to exercise the general power of appointment the principal was to be paid to the son's wife, or descendants, or both, in the proportion provided by the intestacy law of the State of Pennsylvania. It was further provided that, if the son failed to exercise his general power of appointment and left no surviving wife or children, then the corpus was to revert to the decedent, or to his legal representatives, in the event of his prior death. The instrument then added: "In all other respects the Deed above mentioned is hereby ratified and confirmed."

On the same date decedent executed a written instrument which made the same modifications in the Horatio G. Lloyd trust. Except for the names of the beneficiaries the instruments were worded identically.

Mary Wingate Lloyd died on September 23, 1934.

On January 24, 1935, the decedent executed a written instrument which further modified the terms of the Richard W. Lloyd trust. This instrument provided:

WHEREAS, by Deed of Trust dated April 2, 1919, the undersigned HORATIO G. LLOYD assigned, transferred and delivered to Mary Wingate Lloyd certain property therein specified, in trust for his son RICHARD W. LLOYD, for the uses and purposes therein provided, reserving in said Deed this power to modify, amend and declare new trusts respecting said settlement, but not to revoke the same in whole or in part, and further reserving the power to name by appointment the succeeding Trustee in the event of the death, resignation or inability to serve of the said Mary Wingate Lloyd prior to the execution of said trust; and

WHEREAS, by supplemental Deed dated December 27, 1926, in execution of the power to modify, amend or declare new trusts respecting the said settlement, the undersigned declared the new trusts therein specified, and thereby modified and amended the said original Deed of Trust; and

WHEREAS, the said Mary Wingate Lloyd died on the twenty-third day of September, 1934;

Now, THEREFORE, in execution and in complete exhaustion of the power reserved to the undersigned in said original Deed, the undersigned hereby names and designates as Trustees, to succeed the said Mary Wingate Lloyd, H. Gates Lloyd, Jr. and Charles D. Dickey, * * *

On the same date, decedent executed an identically worded instrument in regard to the Horatio G. Lloyd trust, except that Richard W. Lloyd and Charles D. Dickey were designated as the new trustees.

Neither the original trust agreements, nor any of the subsequent modifications, nor the transfers of properties to the trustee, were made by the decedent in contemplation of death.

Both Richard W. Lloyd and H. Gates Lloyd, Jr., survived the decedent. Richard W. Lloyd was born on August 5, 1904, and was unmarried at the time of decedent's death. He married on July 14, 1941. H. Gates Lloyd, Jr., was born on December 6, 1900, and was married at the time of decedent's death. His wife, Eleanor Biddle Lloyd, and three children of their marriage also survived the decedent. Their dates of birth were as follows: Eleanor Biddle Lloyd, wife, July 19, 1906; H. Gates Lloyd, 3d, son, June 3, 1928; Wingate Lloyd, son, September 16, 1931; and Mary Biddle Lloyd, daughter, January 26, 1935. A fourth child, named Prudence Lloyd, was born to H. Gates Lloyd, Jr., and Elizabeth Biddle Lloyd on June 24, 1940.

On the Federal estate tax return petitioners elected to have the gross estate of the decedent valued as of one year after the date of decedent's death, in accordance with the method authorized by sections 302(j) of the Revenue Act of 1926, as amended by section 202 of the Revenue Act of 1935.

The petitioners reported estate tax, under the Revenue Act of 1926, as amended, in the amount of $264,515.02, against which a credit of 80 percent, or, $211,612.02, was claimed for state estate, inheritance, legacy, or succession taxes paid, leaving the net amount of the estate tax computed under the 1926 Act, as amended, $52,903. They also reported additional estate tax, under the Revenue Act of 1932, as amended, in the amount of $809,788.93. The total estate tax reported was $862,691.93. That amount was paid by the petitioners to the collector on April 21, 1938.

On April 16, 1941, the petitioners filed a claim for refund of estate tax in the amount of $7,077.80, on the ground that they had erroneously included in the gross estate certain income which was received by the estate during the period between the date of the decedent's death and the date of the valuation of the estate under the option provided in section 302(j) of the Revenue Act of 1926, as amended. The amount stated in the refund claim was $20,575. The parties have stipulated that the correct amount of such income is $31,315.43. This amount was improperly included in the value of the gross estate.

Respondent added to the decedent's gross estate the sums of $277,103.66 and $277,159.93 representing the values of the trust property of the Richard W. Lloyd trust and the Horatio G. Lloyd trust, respectively, on the ground that the decedent retained, at the time of his death, the right to amend and modify the trust and to declare new trusts, and that this power was not exhausted by the amendments of December 27, 1926, and on the further ground that the decedent retained a power of reverter under the trust deed and amendments.

The value of the entire trust property of the Richard W. Lloyd trust on the optional valuation date, January 21, 1938, was $266,701.16 and not $277,103.66, as determined by respondent in the notice of deficiency. Likewise, the value of the Horatio G. Lloyd trust on January 21, 1938, was $266,757.43 and not $277,159.93, as determined by respondent in the notice of deficiency.

The life estate of Richard W. Lloyd in the trust created for him, on January 21, 1937, the date of decedent's death, had a value of $200,595.99 (being computed according to table A set forth in respondent's Regulations 80, article 10(i), on the principal value of $297,376.44 of said trust on the date of death), and on January 21, 1938, the date for the optional valuation, it had a value of $179,026.46 (being computed according to table A set forth in respondent's Regulations 80, articles 10(i) and 11, on the principal value of $264,734.35 (see footnote 1, infra ) of said trust on that date).

The remainder interest (as distinguished from the possibility of reverter) of the Richard W. Lloyd trust following the said life estate had a value on the date of decedent's death of $94,949.32 (being computed according to table A set forth in respondent's Regulations 80, article 10(i), on the principal value of $297,376.44 of said trust on that date), and on January 21, 1938, it had a value of $84,302.45 (being computed according to table A set forth in respondent's Regulations 80, articles 10(i) and 11, on the principal value of $264,734.35 ^{*716 life estate of H. Gates Lloyd, Jr., in the Horatio G. Lloyd trust on January 21, 1937, had a value of $191,699.76 (being computed according to table A set forth in respondent's Regulations 80, article 10(i), on the principal value of $297,432.71 of said trust on that date), and on January 21, 1938, the optional valuation date, it had a value of $171,142.78 (being computed according to table A set forth in respondent's Regulations 80, articles 10(i) and 11, on the principal value of $264,790.62 2 of said trust on that date).}

OPINION.

HARRON: The question is whether the value of the trusts established by decedent for his two sons should be included in decedent's gross estate under section 302(c) and (d)(1) of the Revenue Act of 1926, as amended, which is set forth in the margin. *718 The primary issue is whether or not decedent's power to alter or modify the trusts was exhausted by the amendments of December 27, 1926. In this respect the facts of the present case are indistinguishable from , in which the Circuit Court of Appeals for the Third Circuit held that, under the laws of Pennsylvania, the exercise of a power to alter, amend, or revoke exhausts that power. Although in the Day case the court speaks about a power to revoke, the power which was exercised was, in fact, no more than a power to change the beneficial interest in the trust. Charles Day created two trusts, in each of which he reserved the power, with the concurrence of the beneficiary, to alter, amend, or revoke the trust. In one trust the income was payable to Day for life, and then to his wife for life, and in the other trust, the income was payable to Day's mother for life, and upon her death the principal was to be paid to Day's estate. In the case of the wife's trust the grantor revoked the clause calling for the payment to himself for life, and provided that the income from that date forth should be paid to his wife during her life. In the case of the trust for his mother, the grantor revoked the clause giving the principal to his estate and provided that it should go to three trusts established for his children. In neither instrument changing the beneficial interest in the trusts did the decedent expressly reserve any future power to alter, amend, or modify. Under those circumstances the Circuit Court of Appeals held that the grantor's power to alter, amend, or revoke was exhausted. On the authority of , it is held that the power to alter, amend, or declare new trusts, which Horatio Gates Lloyd originally retained, was exhausted by the amendments of December 27, 1926. Accordingly, petitioners must be sustained as to the first question. It is held that the value of each trust is not includable in the value of the gross estate under section 302(d), as amended.

The remaining question is whether or not the principal of the two trusts, or any part thereof, must be included in the value of the gross estate under section 302(c) of the Revenue Act of 1926, as amended. Respondent relies upon , as authority in support of his contention that the entire value of each trust must be included in the value of the gross estate.

The facts of the present case are indistinguishable from those in the Hallock case, and its companion cases, ; and . In all of those cases the property was to revert to the grantor upon the death of the life tenant, during the grantor's lifetime. In the present case, certain additional conditions are added, namely, that the life tenant of each trust die without having exercised a power of appointment, and that he die leaving no surviving wife or issue. Those conditions make more remote the possibility that the property will come back to the grantor. However, as was pointed out in , the degree of remoteness is not determinative.

Petitioners rely upon . In that case the trust agreement did not set forth any circumstances upon which the trust property would revert to the grantor. Under certain circumstances, the property was to go to the grantor's next of kin, but he did not reserve any strings by which it could come back to him during his lifetime. In the present case, however, the grantor did provide that under certain circumstances, the property should come back to him during his lifetime. On that basis, the Kellogg case is distinguishable, and some part of the value of the trust property must be included in decedent's gross estate.

Petitioners argue that, in the event the trusts for the decedent's two sons are held to come within the ruling in the Hallock case, only the value of the reverter, and not the full value of the principal of the trusts, is to be included in the gross estate. In support of that position, petitioners cite , in which the Court of Claims points out that the deficiency which was ultimately determined in the Hallock case excluded from the gross estate the value of the life estate, which was in effect at the grantor's death. The same was true in the Bryant case. Accordingly, it is held that the value of the life estate of the decedent's two sons must be excluded from the value of the decedent's gross estate in determining the proper amount of the deficiency. The value of the life estates as stipulated will be adjusted under section 302(j)(2) of the Revenue Act of 1926, as amended, in accordance with the provisions of article 11 of Regulation 80 (1937 Ed.).

In recomputing the amount of the deficiency in estate tax under Rule 50, consideration should be given to petitioners' claim for an increased credit for additional state estate, inheritance, legacy, or succession taxes which petitioners are required to pay, and do pay, by reason of the increased Federal estate tax under the holding made here. Under section 802(a) of the Revenue Act of 1932, amending section 301(b) of the Revenue Act of 1926, the credit for state inheritance taxes, not to exceed 80 percent of the Federal estate tax, shall be in the amount of state inheritance taxes actually paid before the expiration of 60 days after the Board's decision becomes final.

Decision will be entered under Rule 50.

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Footnotes

• 1. The parties have stipulated that the value of the entire trust property in the Richard W. Lloyd trust on the optional valuation date, one year after the decedent's death, was $266,701.16. The parties also stipulated the values of the life estate and the remainder interest in the trust, as of the same date, but on the basis of principal value of $264,734.35. The reason that these two stipulated values are in different amounts is not set forth. ↩

• 2. The parties have stipulated that the value of the entire trust property in the Horatio G. Lloyd trust on the optional valuation date, one year after the decedent's death, was $266,757.43. The parties also stipulated the value of the life estate and the remainder interest in this trust, as of the same date, but on the basis of principal value of $264,790.62. The reason that these two stipulated values are in different amounts is not set forth. ↩

• 3. [Section 302(c) of the Revenue Act of 1926, as amended by section 803(a) of the Revenue Act of 1932, and as further amended by section 404 of the Revenue Act of 1934; and section 302(d)(1) of the Revenue Act of 1926, as amended by section 401 and 404 of the Revenue Act of 1934, and as further amended by section 805 of the Revenue Act of 1936.]

  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, except real property situated outside the United States.

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  (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, or of which he has at any time made a transfer, by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property, or (2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom; except in case of a bona fide sale for an adequate and full consideration in money or money's worth. Any transfer of a material part of his property in the nature of a final disposition or distribution thereof, made by the decedent within two years prior to his death without such consideration, shall, unless shown to the contrary, be deemed to have been made in contemplation of death within the meaning of this title.

  (d)(1) To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona-fide sale for an adequate and full consideration in money or money's worth), 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 (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished in contemplation of decedent's death. ↩