Hornor v. Commissioner , 44 B.T.A. 1136 ( 1941 )

ESTATE OF WILLIAM MACPHERSON HORNOR, DECEASED, JULIA C. HORNOR, EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hornor v. Commissioner

Docket No. 102931.

United States Board of Tax Appeals

44 B.T.A. 1136; 1941 BTA LEXIS 1225;

July 31, 1941, Promulgated

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">*1225 1. Property held by the entirety was conveyed to a trust less than two years before the husband's death; the spouses reserved income and a joint power of revocation or modification during their joint lives, and with a son were trustees with power of management. The value of the property and accumulated trust income, held, properly included in the husband's gross estate (a) because the evidence fails to overcome the determination that the trust was created in contemplation of death; (b) because of the power to revoke and the reservation of life income.

2. Gift taxes paid by both the husband and wife on a transfer in trust of property held by the entirety and later included in the husband's gross estate, held, properly to be credited against the estate tax, notwithstanding that a portion of the gift tax was paid by the wife.

3. Interest on a tax deficiency which accrued after the decedent's death, held, not deductible as a claim against his estate for the computation of estate tax.

F. Raymond Wadlinger, Esq., for the petitioner.

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

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STERNHAGEN

">*1136 The Commissioner determined a deficiency">*1226 of $292,339.39 in estate tax. Petitioner assails the inclusion in gross estate of (1) the full value of real and personal property held by the entirety which decedent and his wife transferred in trust within two years of decedent's death, reserving income for life to themselves jointly and a joint power of ">*1137 revocation and alteration; (2) undistributed income of the trust, held or accrued at decedent's death and distributable to decedent and wife jointly; (3) bank accounts, insurance policies, and a residence, all held by the entirety. Petitioner seeks a credit for gift taxes paid by the wife upon the transfer of land held by the entirety to the trust and a deduction for interest on a gift tax deficiency accruing after decedent's death.

FINDINGS OF FACT.

William Macpherson Hornor, a resident of Bryn Mawr, Pennsylvania, died on January 18, 1937, and Julia C. Hornor, his widow, is the executrix of his estate. She filed a Federal estate tax return at Philadelphia.

1. The decedent was the owner of 107 parcels of real estate in and near Philadelphia, most of which were acquired by him under his mother's will; the rest were purchased. During the years 1925-1935 he">*1227 conveyed these properties to himself and his wife as tenants by the entirety. The wife contributed no part of the cost of acquiring them, and paid nothing for the conveyance to the entirety.

On December 31, 1935, they conveyed the properties to themselves and Peter T. Hornor as trustees to hold, manage, invest, and reinvest, collect the income, pay expenses, and distribute the net income "jointly" to the settlors for their joint lives and the life of the survivor; one-fourth of the net income to each of four sons for life thereafter; then to a son's appointee or, if none, to his descendants, and upon the death of the last survivor of the sons, to distribute one-fourth of the corpus to the appointee of each son or his descendants. The settlors reserved a joint power of revocation, modification, and withdrawal of any or all of the trust estate during their joint lives. After the death of the first to die, the trust was to be irrevocable. At the time of decedent's death the properties had an aggregate value of $1,143,900.

The trust was created after decedent was advised by an attorney that it would effect a tax saving and also because it would provide protection for the sons. ">*1228 Decedent was then about seventy-six years of age. During the years immediately preceding, he had attended to business matters; consulted a real estate broker about once a week; made frequent trips from Bryn Mawr to Philadelphia; and examined properties offered for sale and repairs on properties in which he had an interest. He made two purchases of land during 1935. In 1921 he had suffered a heart attack. For years he had been attended by a physician for colds. He never expressed apprehension of an early death, and was active until his last illness, which began on January 6, 1937.

">*1138 2. Decedent and his wife, as tenants by the entirety, had a joint checking account with the Philadelphia National Bank, ^{1941 BTA LEXIS 1225">*1229 On May 15, 1936, decedent and his wife deposited in the trustees' account a check for $885 issued to them by the Fire Association of Philadelphia for a fire loss of property held by the trustees. The insurance policy had not been transferred to the trustees. "The check belonged to the said trustees."}

On January 28 and December 21, 1936, checks for $241.90 and $39.80 were deposited in the trustees' account. These checks were for dividends under fire insurance policies on property owned by the entirety and later conveyed to the trustees. The policies had not been transferred to the trustees. The dividends were the proportionate share of earnings on amounts paid for perpetual fire insurance and were not refunds.

3. For gift tax purposes the Commissioner determined that the value of decedent's interest in the real estate conveyed in trust was $228,814.32 and that the value of his interest in the checks for $6,066.70 transferred in trust was $1,286.99. Decedent paid gift taxes of $11,293.29 and $164.09, respectively, on these transfers, or a total of $11,457.38. The wife paid gift taxes in respect of such transfers of $43,777.11 and $438.62, or a total of $44,215.73. Total">*1230 gift taxes of $55,673.11 were thus paid on the transfers.

4. Decedent paid interest of $694.49 and his wife paid interest of $3,717.99 on the aforesaid gift taxes. Of the interest paid by decedent, $568.37 represented interest due and accrued to the date of death.

5. At the time of death the trustees held $63,384.69 undistributed income from the trust estate, and they thereafter received $4,197.07, consisting of rents from the real estate held in trust and payable to decedent and his wife jointly. Of the $63,384.69 the trustees made a payment of $17.74 for decedent's account and of $252.57 for his wife's account.

6. Decedent and his wife owned three bank accounts by the entirety. One was a joint checking account with the Pennsylvania Co., etc., in which the balance on January 6, 1937, was $165.87. On that date they deposited a check for $1,000, issued to them by the trustees as a distribution of rental income from the trust. Checks aggregating $498.27 were drawn against it, and at the time of death there remained a balance ">*1139 of $667.60. The second, a joint savings account with the Bryn Mawr National Bank, had a balance of $3,701.61 at the time of death. ">*1231 Of this balance, $1,378.76 represented deposits of rents received from real estate owned by the entirety and $268.35 was interest on the account. The third, an account with the Western Saving Fund Society, had a balance of $1,321.22, of which $400 represented deposits of rents received from real estate owned by the entirety and $921.22 was interest on the account.

7. For a deposit of $75, paid by decedent and his wife from rents of real estate owned by the entirety, a policy of perpetual fire insurance was issued on one parcel of real estate transferred to the trust. The value of this policy at death was $67.50.

8. Under his mother's will, decedent had acquired a house and lot at Bryn Mawr, in which he and his wife resided. He conveyed it to his wife on November 21, 1921, and she conveyed it on October 25, 1927, to the entirety through a third person.

9. After filing the estate tax return, the executrix paid $250.78 as expenses of administration.

OPINION

STERNHAGEN: 1. The petitioner contests the Commissioner's inclusion in the gross estate of the value of the real properties held in trust after the transfer in 1935 by decedent and his wife as tenants by the entirety. ">*1232 Decedent had originally acquired the properties individually and had then transferred them into entirety ownership. The propriety of the inclusion in the gross estate seems clear upon any one of several grounds.

The Commissioner has held that the transfer by the decedent to the trust in 1935 was made in contemplation of death. The transfer was less than two years before the death, and the statute, section 302(c), Revenue Act of 1926, expressly presumes that it was made in contemplation of death "unless shown to the contrary." The evidence fails to show to the contrary, and for this reason, if for no other, the property transferred is within the gross estate.

Had the property been held directly by the decedent and his wife as tenants by the entirety, it would have been within the gross estate by virtue of section 302(e) of the Revenue Act of 1926, as an interest in property "held as joint tenants by the decedent and any other person, or as tenants by the entirety by the decedent and spouse." ; ">*1233 . The petitioner seeks to escape this provision of the statute by reason of the intervention of the trust set up in 1935. But, other than the creation of a purely legalistic title in ">*1140 the spouses and their son as trustees instead of the spouses alone as owners, the trust, for present purposes, accomplished nothing. Until the first decedent died, it was revocable; and until both settlors died, the income was distributable to them. These reservations deprived the trust of substance sufficient to withhold it from the gross estate. A trust created by joint tenants or tenants by the entirety has no greater force to keep the property from the gross estate of one of the settlors than would a similar trust created by an individual. Revocability and reservation of income for life leave the property in the settlor's gross estate as effectively in one case as in the other. Property held in a revocable trust is within the gross estate, ; ">*1234 ; . So is property of which the decedent has a possibility of reversion, .

All of these considerations unite to require that the property held in trust as the result of the transfer by decedent and his wife as tenants by the entirety be included within his gross estate. The Commissioner's determination is sustained.

2. Three items were included by the Commissioner in the gross estate, of which one, amounting to $885, should, it is stipulated, be eliminated from the gross estate.

a. The amount of $4,900 was held in the trustees' bank account, having been transferred by decedent and his wife from their entirety bank account, where it had been deposited upon its receipt by them as rents from the real property held in the name of the trust. The petitioner contends that the amount may not be included in the gross estate because it belonged to the trustees. The answer is the same as that which requires the real property to be included in the gross estate, i.e., that the trust may not be recognized">*1235 as providing insulation against the tax.

b. This is likewise the decision in respect of the $281.70 which was received by the decedent and his wife from the fire insurance company as a distribution of earnings attributable to the deposited premiums. The petitioner's contention, that because the insured properties were owned by the trust, the distributions may not be attributed to the husband and wife so as to be included within the husband's gross estate, must be rejected.

The determination as to the two items is sustained.

3. When the trust was created in 1935 and the entirety property was transferred to it by the decedent and his wife, gift taxes were paid amounting to $55,673.11, of which the decedent paid $11,457.38 and the wife $44,215.73. The petitioner, on the estate tax return, ">*1141 took as the credit provided by Revenue Act of 1932, section 801, ^{1941 BTA LEXIS 1225">*1236 While ordinarily a deduction for taxes is only available to him who pays it, this is not a deduction but a credit for the manifest purpose of avoiding multiple tax in respect of the same transfer. The gift tax and the estate tax are cognate, and an inter vivos transfer of property which by special statutory provision is included in the gross estate and thus subject to the estate tax is not independently treated as subject to an entirely separate gift tax. To impose both taxes without regard to each other would operate so harshly as to justify the belief that such an intention would be unmistakably expressed. Instead, the contrary intention is clearly indicated by the section. We think that the tax of $55,673.11 paid upon the gift must be credited in the manner provided by the section against the estate tax, notwithstanding the fact that $44,215.73 was paid by the wife, who was the other tenant by the entirety.}

The determination disallowing the credit is reversed.

4. Apparently the gift tax just considered was paid for the decedent after his death and carried interest for late payment. The total amount of interest so paid was $694.49, of which $568.37 was attributable">*1237 to the period between the due date and the death. The Commissioner disallowed the rest. This is correct, since the interest which accrued after the taxpayer's death can not be regarded as a claim against the estate, (reversed and remanded, C.C.A. 2d Cir., on stipulation not covering this point); .

5. The petitioner contests the inclusion in the gross estate of more than one-half of the amounts held by the trustees as undistributed income and rents. This contention is founded upon the joint interest of decedent and his wife in the trust, or the entirety interest in the real properties placed in trust. In either aspect, the inclusion of the ">*1142 entire amount in the husband's estate was proper. Since the trust may for present purposes be properly ignored, as has been held, the interest in the income from the properties was held either jointly or by the entirety. If the trust were not to be ignored, nevertheless the income was distributable jointly to petitioner and his wife, and hence this joint property is by the same">*1238 statute to be included within the gross estate. So, in any event, there is no ground upon which any part of this amount may be excluded from the gross estate.

The Commissioner's determination is sustained.

6. Each of the three bank accounts described in the findings was owned jointly or by the entirety and is, therefore, subject to the considerations heretofore stated and properly within the gross estate. The Commissioner's determination is sustained.

7. The value of the perpetual fire insurance policy covering real estate transferred by the entirety to the trust is for the same reasons properly within the gross estate. The Commissioner's determination is sustained.

8. The residence property had been owned by the decedent, and its subsequent conveyance by him to his wife in 1921 was without consideration. Therefore, her entirety ownership at the time of his death does not serve to keep any part of its value from his gross estate. The Commissioner's determination is sustained.

9. The $250.78 expenses of administration paid by the executrix is conceded by respondent in his brief to be a deduction.

In summary, the determination is sustained except for the $885">*1239 in item 2, which is to be excluded from the gross estate, the gift tax credit of $44,215.73 of item 3, which is to be allowed, and the $250.78 of item 9, which is to be deducted.

Reviewed by the Board.

Decision will be entered under Rule 50.

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Footnotes

• 1. This is in accordance with the language of the stipulation: "Check on joint checking account with Philadelphia National Bank owned by decedent and his wife as tenants by the entirety." ↩

• 2. SEC. 801. CREDIT OF GIFT TAX ON ESTATE TAX.

  Section 301 of the Revenue Act of 1926 is amended by inserting after subdivision (a) a new subdivision to read as follows: "

  (b) (1) If a tax has been paid under Title III of the Revenue Act of 1932 on a gift, and thereafter upon the death of the donor any amount in respect of such gift is required to be included in the value of the gross estate of the decedent for the purposes of this then there shall be credited against the tax imposed by subdivision (a) of this section the amount of the tax paid under such Title III with respect to so much of the property which constituted the gift as is included in the gross estate, except that the amount of such credit shall not exceed an amount which bears the same ratio to the tax imposed by subdivision (a) of this section as the value (at the time of the gift or at the time of the death, whichever is lower) of so much of the property which constituted the gift as is included in the gross estate, bears to the value of the entire gross estate." ↩