Broderick v. Commissioner , 38 B.T.A. 1421 ( 1938 )

JOHN K. BRODERICK, EXECUTOR OF THE ESTATE OF EMILIE C. BRODERICK, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Broderick v. Commissioner

Docket No. 89759.

United States Board of Tax Appeals

38 B.T.A. 1421; 1938 BTA LEXIS 739;

December 23, 1938, Promulgated

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Held, where in 1919 and 1930, several years prior to her death and while she was in good health, decedent conveyed property by irrevocable trusts to a trustee in order (a) to protect a family trust in the latter's hands, (b) to relieve herself from management of the properties conveyed, and (c) to assure to herself the income from the trust corpus during the remainder of her life, the transfer was not made in contemplation of death; held, further, the fact that decedent reserved to herself the income from the trust during her lifetime and provided for distribution of its income and corpus after her death to her grandchildren did not make the transfer, under the provisions of the revenue act then applicable, one "taking effect in possession or enjoyment at or after death." Thomas C. Boswell et al., Executors,37 B.T.A. 970">37 B.T.A. 970.

G. A. Stamm, Esq., and Phil Morelock, Esq., for the petitioner. Ralph F. Staubly, Esq., for the respondent.

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BLACK

In this proceeding the petitioner, as executor of the estate of Emilie C. Broderick, deceased, contests $30,876.63 of a $30,957.59 estate tax deficiency.

The sole issue presented involves the question as to whether the transfers by the decedent, Emilie C. Broderick, under indentures of trust dated July 19, 1919, and October 21, 1930, constituted a transfer in contemplation of death or intended to take effect in possession or enjoyment at or after death under section 302(c) of the Revenue Act of 1926 prior to its amendment, the issue with regard to the retroactive application of section 302(c) of the Revenue Act of 1926 as later amended by the joint resolution of March, 3, 1931, and later revenue acts, being admitted by counsel for the respondent to have been settled in favor of the taxpayer by the decision of the Supreme Court of the United States in , and .

FINDINGS OF FACT.

Emilie C. Broderick, a resident of the county of St. Louis, State of Missouri, died testate February 17, 1935. By her last will and testament she disposed of an estate of a value of $62,320.84. She left surviving her three children, John K. Broderick, a son, Arthur L. Broderick, a son, and Mary Angela Broderick Jennings, a daughter, the wife of Edgar M. Jennings, the said John K. Broderick having three children, Arthur L. Broderick having three children, and Mary Angela Broderick Jennings six children, together comprising twelve grandchildren of Emilie C. Broderick who were living on February 17, 1935.

Emilie C. Broderick was the widow of John J. Broderick, who died in the city of St. Louis, State of Missouri, on June 7, 1919, leaving an estate which was probated in the Probate Court of the City of St. Louis, State of Missouri. His estate has for many years been fully administered and the administration closed. The assets of the estate of John J. Broderick, deceased, included, among other items, 1,477 shares of the capital stock of the Broderick & Bascom Rope Co., a corporation which for over 60 years has been engaged in the manufacture and sale of wire rope in St. Louis. The 1,477 shares of the Broderick & Bascom Rope Co. stock were by the will of John J. Broderick, deceased, bequeathed to John K. Broderick as testamentary trustee, the trust to continue during the life of the widow, Emilie C. Broderick, and for 10 years thereafter. The remaining assets of the estate of John J. Broderick were by his will devised and bequeathed absolutely, free of trust, in four equal parts to his wife, Emilie C. Broderick, and his three children, John K. Broderick, Arthur L. Broderick, and Mary Angela Broderick Jennings.

The stock of the Broderick & Bascom Rope Co. now and heretofore outstanding consists of 3,000 shares of common stock, there being no preferred stock authorized or outstanding. The 1,477 shares of Broderick & Bascom Rope Co. stock, which comprised the assets of the testamentary trust under the will of John J. Broderick, together with 23 shares of the same stock owned by other members of the Broderick family, comprise one-half of the outstanding capital stock of the Broderick & Bascom Rope Co., and this equal ownership of one-half of the stock has existed at all times since the date of death of John J. Broderick on June 7, 1919, and for some time prior thereto.

John J. Broderick in his lifetime, and again in his will, had stressed the importance of preserving this equal one-half stock interest intact at all times, and the members of the Broderick family have since June 7, 1919, and prior thereto, always had in mind the fact that by holding this one-half interest intact the Broderick family was enabled to assure to certain of its members their official positions in the Broderick & Bascom Rope Co. and an equal voice in the management of the company and the distribution of its earnings.

The Broderick and Bascom families each owned an equal one-half of the outstanding capital stock of the Broderick & Bascom Rope Co. from the time it was incorporated. Prior to his death, John J. Broderick was the representative of the Broderick family and president of the company; and Joseph D. Bascom was the representative of the Bascom family and was secretary and treasurer of the company. At the time of John J. Broderick's death on June 7, 1919, John K. Broderick, his son, was in the employ of the company, but he held no elective office and was not a director of the company; on the other hand, Charles E. Bascom, son of Joseph D. Bascom, held the elective office of assistant secretary and treasurer and was a director of the company. Immediately prior to the death of John J. Broderick, the board of directors consisted of John J. Broderick, Joseph D. Bascom, Charles E. Bascom, and J. J. Hawk, the latter being cashier of the company. Hawk owned no stock in his own right and held no elective office in the company and had no authority in the management of the company, being merely the cashier and head bookkeeper. For many years prior to June 7, 1919, no cooperation or harmony had existed between the Broderick and Bascom families and this condition existed for some time after the death of John J. Broderick. On June 7, 1919, when John J. Broderick died, the Broderick family found that the one-half of the outstanding stock of the corporation which it owned did not enable it to elect any of the members of the Broderick family or any one else to official positions in the company, either as officers or directors, and this left the control of the company in the hands of the Bascom family, with Joseph D. Bascom as secretary and treasurer and his son, Charles E. Bascom, as assistant secretary and treasurer. Prolonged and bitter negotiations ensued during the period from June 7, 1919, to February 2, 1920. The Bascom family endeavored during this period to prevent the Broderick family from acquiring any active connection with or participation in the management of the company. It was impossible during this period to fill the vacancy as director and the vacancy as president created by the death of John J. Broderick. On February 2, 1920, a meeting of the stockholders and a meeting of the directors was held by mutual agreement, at which John K. Broderick was elected a director to fill the vacancy caused by the death of his father, John J. Broderick; the position of chairman of the board of directors was created; John K. Broderick was elected president; Charles E. Bascom was elected secretary and treasurer; Joseph D. Bascom was elected chairman of the board of directors; John K. Broderick and Charles E. Bascom were elected general managers, with broad authority as to the active management of the company; and the position of assistant secretary and treasurer was discontinued and abolished.

On the same date, February 2, 1920, a written agreement was entered into between the Broderick family and the Bascom family by which it was agreed that the office of chairman of the board was to be continued until the death or voluntary retirement of Joseph D. Bascom, and a method of arbitration was provided if the general managers were unable to agree on any question in the future conduct of the business of the company, and other points of difference between the two families were compromised and settled.

On July 19, 1919, Emilie C. Broderick executed a trust indenture by which she conveyed to her son, John K. Broderick, as trustee, the real and personal property described therein. The property which went into that trust included her one-fourth distributive share in her husband's estate (this did not include her life interest in the Broderick and Bascom stock) and other property and securities which she owned in her own right. Emilie C. Broderick at that time had an independent estate of her own which she had accumulated over a number of years. This independent estate had come from her husband during the period previous to 1910. The property and securities which went into the trust represented about one-half of her property and securities which she then owned, including the property which was specifically bequeathed to her in the will of her husband, John J. Broderick.

During 1930 John K. Broderick, as trustee under the indenture of trust executed by Emilie C. Broderick on July 19, 1919, and Emilie C. Broderick were advised by counsel that the provision of the indenture of trust of July 19, 1919, whereby it was directed that the trust should continue during the life of the grantor and until the youngest grandchild of the grantor should attain the age of 25 years violated that principle of law commonly known as the rule against perpetuities. Thereupon, on October 21, 1930, Emilie C. Broderick executed a new trust indenture. Both trust indentures were irrevocable and provided in considerable detail for exclusive and broad powers to the trustee, including the right to hold and deal with the corpus of the trust as fully as though he and his successors in trust were the absolute owners thereof, "including the right to use any or all of this trust property to protect the interests of the Broderick family in the stock of the Broderick & Bascom Rope Company." Other provisions of the trusts gave the income from the corpus to the decedent during her life and provided for the distribution of the corpus after her death to her grandchildren. None of the corpus was to go to decedent's estate. These provisions are not incorporated herein because respondent does not contend that decedent retained any part of the corpus for her estate after death or any power to alter or amend or revoke the trusts during her lifetime so as to revest in herself any part of the principal of the trusts. The second trust, dated October 21, 1930, after stating that counsel had advised that the first trust was void on account of its violation of the rule against perpetuities and that it was therefore necessary to execute a new trust, contains the following statement:

Whereas, I, the undersigned, desire to now establish and create a new valid trust of the aforesaid property now in the possession of said trustee under said void trust, which the said trustee has expressed his willingness to retransfer to me, the undersigned, for the purpose of establishing this new trust, or for any other purpose whatsoever * * *.

Then follow provisions which, as already stated, are substantially the same as the first trust, except those provisions which were deemed to be in violation of the rule against perpetuities. Other provisions were inserted in lieu of these, which in the opinion of counsel would relieve the new trust from this defect.

On July 19, 1919, when Emilie C. Broderick executed the trust indenture of that date, she was 63 years of age; and on October 21, 1930, when she executed the trust indenture of that date, she was 74 years of age; at the time of her death, on February 17, 1935, she was 79 years of age, her date of birth having been December 31, 1855. On and prior to July 19, 1919, and thereafter continuously to within approximately two months before her death on February 17, 1935, Emilie C. Broderick was in good health, both mentally and physically. She suffered from no physical or mental ailment at either July 19, 1919, or on October 21, 1930, nor during the intervening period. During the last 15 years of her life and until a few months before her death on February 17, 1935, she traveled extensively. Her death was caused by an apoplectic stroke that resulted in an illness which lasted about two months and terminated with her death on February 17, 1935. The transfer effected through the medium of the trust created July 19, 1919, and redeclared on October 21, 1930, was not prompted by any condition of body or mind of Emilie C. Broderick that would have led her to believe that her death was imminent or near at hand or that her death was likely to occur within a reasonably distant future.

The trust indenture entered into on July 19, 1919, and the redeclaration of the trust on October 21, 1930, were each created for the uses and purposes therein respectively set out, one of which was, as specified in each of the trust indentures, to create a trust fund to which access might be had at any time, including the right to use any or all of the trust property, to protect the interests of members of the Broderick family in the stock of the Broderick & Bascom Rope Co., and another of which was to assure to the transferor, Emilie C. Broderick, the income from the trust corpus during the remainder of her life; also, having in mind the fact that the accumulation of the stock of the Broderick & Bascom Rope Co. had been a large part of her husband's life work and recognizing her lack of business experience and lack of knowledge in the handling of investments, she desired to relieve herself of the cares and worries connected with the management of the property to be transferred in trust by placing the responsibility therefor upon her older son, John K. Broderick.

The value of the trust assets on February 17, 1935, amounted to $274,139.93, which amount was included by the respondent in the gross estate of the decedent, Emilie C. Broderick, for estate tax purposes. Respondent stated his reasons for such inclusion as follows in the deficiency notice:

The property transferred by this decedent under indentures of trust dated July 19, 1919, and October 21, 1930, is herein included in the gross estate for Federal Estate Taxes under the provisions of Section 302 of the Revenue Act of 1926, as amended, as a transfer in contemplation of and/or intended to take effect in possession or enjoyment at or after death.

Neither of the transfers was made in contemplation of death, nor were they intended to take effect in possession or enjoyment at or after death.

OPINION.

BLACK: The parties are in accord as to the principal facts, but disagree as to the legal implications arising from them. The law presumes, however, that the respondent correctly construed the facts in the first instance when he determined the deficiency and the burden is upon the petitioner to overcome that presumption.

The petitioner contends that the facts established in the record negative "contemplation of death" as an impelling motive in causing the decedent to transfer her property to the trustee under the indentures dated July 19, 1919, and October 21, 1930. We think petitioner has met his burden of proof in that respect.

At the outset of this opinion we take note of the situation in the affairs of the Broderick family with respect to its interests in the Broderick & Bascom Rope Co. in June 1919, following the death of John J. Broderick, and the economic necessity which compelled action to protect them. The family stock in that corporation, through John J. Broderick's will, had already been transferred to a trustee to hold in trust until 10 years after death of the mother (decedent herein). The parties have stipulated that since June 7, 1919, and prior thereto the members of the Broderick family have had in mind holding together intact their said stock in order to assure to them official positions with and equal voice in the management of the corporation; also, that reasons for decedent's having transferred the disputed assets to the trustee of the existing trust were to (a) provide for a fund which might be used should that become necessary in protecting the interests of the Broderick family in the corporation, (b) to assure to the transferor, Emilie C. Broderick, the income from the trust corpus during the remainder of her life, and (c) to relieve herself from the care and worries of managing the properties transferred. The parties also agree that the transfer at issue was not prompted by any condition of body or mind of the decedent that would have led her to believe that death was imminent or near at hand or that her death was likely to occur within a reasonably distant future.

These concessions of fact on the part of respondent would seem to foreclose the issue against him unless a construction of the trust instruments and the circumstances under which they were executed would justify a conclusion that they were testamentary in character and used primarily to effect a distribution of decedent's property at or after her death. The respondent contends that the trust instruments call for such a construction. In his brief the respondent asks us to find, in addition to the proposals of fact made by the petitioner to which he "subscribes", that one of the motives for the transfers was to make provisions for disposition of the trust corpus to and among decedent's grandchildren to take effect in enjoyment after her death. He also asks us to find "that it never became necessary, during the decedent's lifetime to use any part of the trust corpus to protect the interests of the decedent's family" in the Broderick & Bascom Rope Co. The last request need not be considered. Obviously the finding asked for would be material to no issue here, inasmuch as the protection intended by the trust was not limited to decedent's lifetime; neither could the transferor's motive be affected by the happening or nonhappening of the contingency it was intended to protect against.

As to the respondent's contention that one of the motives for transfer in question was disposition of the trust corpus to and among decedent's grandchildren, effective at her death, we think such inference naturally follows from the trust instruments. Such finding, however, does not dispose of the case in the Commissioner's favor, since as between that and the several other admitted motives we think the motive to dispose of the corpus of her property after death to her grandchildren was secondary to the other impelling motives. Cf. . Naturally, when one executes a trust instrument directing how the income shall be paid during his lifetime and what disposition shall be made of the corpus after his death, the latter provision contemplates his death at some future time. That is the very purpose of disposal of the remainder at or after death. But such a provision does not necessarily mean that the transfer is made "in contemplation of death" within the meaning of the applicable statute. It may do so sometimes, depending altogether on the facts and circumstances of the particular case. In the Boswell case, by the trust instrument decedent provided for distribution of the income from the trust property during his life and for its further disposition, as well as that of the corpus, after his death.

The Commissioner argued there, as he has argued here, that notwithstanding that the settlor of the trust was in excellent physical health when the executed the trust and had no expectation of death from any existing bodily infirmity, yet, because the trust instrument made disposition of the remainder interest after his death, it was executed "in contemplation of death" within the meaning of the applicable statute. We denied that contention and held that the transfer to the trust was not made in contemplation of death nor was it intended to take effect in possession or enjoyment at or after death. It must be admitted that respondent's contention in this respect finds some support in the decision of the Tenth Circuit in . Respondent in his brief cites that case, among others, and urges it as authority to support his views. That case, however, was recently reversed by the Supreme Court of the United States, and the Board's finding that the transfers in question were not made in contemplation of death was upheld. See . The Supreme Court in that case pointed out that the learned Circuit Court in reversing the Board had erroneously interpreted the meaning of the term: "In contemplation of death." On this point, the Supreme Court said:

The Court's opinion seems to rest upon an erroneous interpretation of the term "in contemplation of death." The meaning of this was much discussed in United Statesv. Wells, supra. We adhere to what was there said. 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." Broadly speaking, thoughtful men habitually act with regard to ultimate death but something more than this is required in order to show that a conveyance comes within the ambit of the statute.

With the aid of the facts before us, we think it clear that the "particular concern" which dominated the mind of the decedent on July 19, 1919, and October 21, 1930, when the transfers herein were executed, was decedent's solicitude for and desire to protect her family's interests in the Broderick & Bascom Rope Co. Important also was decedent's desire to assure to herself her life income from her private estate through placing its management in the hands of the trustee and relieve herself of business responsibilities to which she was unaccustomed. These purposes as inducements for the transfer are conceded by the respondent and in the circumstances shown we find them to have been paramount to all others in decedent's mind and of her first and particular concern when she executed the transfers. In view of these findings, we hold that the petitioner has successfully sustained the burden put upon him of showing that the transfers in issue were not made in contemplation of death.

The respondent argues that the provision in the trust instrument giving decedent a life estate in the trust income and directing distribution of the corpus among her grandchildren after her death makes the trust corpus a part of the decedent's gross estate under section 302(c) of the Revenue Act of 1926 as transferred interests "intended to take effect in possession or enjoyment at or after" death. On this claim as applied to the present transfer, we find that the authorities are against respondent's contentions. Here decedent reserved no power to revoke or change any of the provisions of the trust deeds, but conveyed title to and delivered possession of the assets to the trustee without condition. Her economic interests, therefore, in possession and enjoyment passed out of her hands and vested in the trustee when the trust was made. ; ; ;

If the transfers in question had been executed after the effective date of the joint resolution of March 3, 1931, or of section 803 of the Revenue Act of 1932, amending section 302(c) of the Revenue Act of 1926, admittedly the value of the property in question would be included as a part of decedent's gross estate for estate tax purposes because decedent reserved to herself for life the income from the property, but both trust indentures were executed prior to the effective dates of such provisions of the law, and under the recent decisions of the Supreme Court of the United States in , and , these provisions have no retroactive effect.

For reasons above stated, we hold that the respondent erred in including the trust assets valued at $274,139.93 in the decedent's estate.

The parties having stipulated that the value of the estate disposed of by decedent under her last will and testament and concededly includable in decedent's gross estate amounted to $62,320.84, the estate tax herein will be recomputed upon that value.

Decision will be entered under Rule 50.