Clowe v. Commissioner

Estate of Frank Clowe, Deceased, Martha Clowe Dickinson, Executrix, Petitioner, v. Commissioner of Internal Revenue, Respondent

Clowe v. Commissioner

Docket No. 26779

United States Tax Court

17 T.C. 1467; 1952 U.S. Tax Ct. LEXIS 252;

March 12, 1952, Promulgated

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">*252 Decision will be entered under Rule 50.

1. Estate Tax -- Rule Against Perpetuities -- Vesting -- Interpretation. -- The rule against perpetuities was not violated where an ambiguous provision of a deed of trust could be read as providing that the remainder interest should go to persons ascertainable at the death of a person in being at the time the trust was created.

2. Estate Tax -- Power to Terminate -- Section 811(d)(1). -- The decedent, the grantor of an inter vivos trust, had a power to terminate within the meaning of section 811(d)(1) where, in conjunction with the other trustees, he could sell trust property, under the trust instrument such a sale terminated the trust, and the termination might change the persons who would take the remainder.

Will M. Sutton, Esq., for the petitioner.

Donald P. Chehock, Esq., for the respondent.

Murdock, Judge.

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MURDOCK

">*1467 The Commissioner determined a deficiency of $ 39,889.07 in estate tax. The only issue for decision is whether he erred by including in the gross estate under section 811(d)(1) an amount to represent the value of property in a trust created by the decedent on November 18, 1937.

FINDINGS OF FACT.

Frank Clowe died on August 22, 1946, while residing in Texas. He was then 62 years of age. The estate tax return was filed with the collector of internal revenue for the second district of Texas.

The decedent and his first wife were divorced in 1928. They had one child, Martha, born October 28, 1915. The decedent remarried in December 1929. He and that wife separated prior to November 18, 1937, and were divorced in September 1940. No children were born of that marriage. The decedent did not marry again.

">*1468 Martha received most of her education in boarding schools until she finished high school. Thereafter, she attended college until some time in 1937. She spent little time with her ">*254 parents during that period. She resided with the decedent in a hotel at Lubbock, Texas, from 1937 until she was married on July 15, 1939. She has three children, the first born September 1, 1940, and the third born March 28, 1945. She was divorced in 1948 and did not remarry. She is the sole beneficiary under the will of the decedent.

The decedent felt that his daughter lacked business ability and desired to provide her with some assured income.

The decedent created a trust on November 18, 1937, to which he transferred 500 shares of the common stock of Clowe & Cowan, Inc., "for the sole use and benefit of Martha Clowe * * * subject to the terms and conditions set forth in this trust agreement." He named as trustees John Cowan, R. G. Mills, an employee of Clowe & Cowan, Inc., and himself. The trustees were authorized "subject to the other provisions of this agreement" to hold, manage, sell, and dispose of the trust properties "as in their discretion they may deem to be for the best interests of the said Martha Clowe, beneficiary hereunder." The trustees, after paying all expenses and taxes, were to pay the net income annually "to the beneficiary hereunder." The trust instrument">*255 contained a provision that the payments could not be anticipated or encumbered in any way. It provided for successor trustees. The trustees were required to make an annual report to Martha. The trust instrument contains the following provisions:

10. This trust agreement shall remain in full force and effect for a period of twenty-five years from and after the 18th day of November, 1937, unless sooner terminated under the following conditions, or either of them:

(a) If said Trustees have on or before ten years from the effective date of this trust as hereinabove provided sold and disposed of the stock in Clowe & Cowan, Inc. above referred to, then this trust shall terminate at the expiration of ten years from date hereof.

(b) If, after the expiration of ten years from date hereof, the stock in Clowe & Cowan, Inc. shall be disposed of by said Trustees, then upon such sale this trust shall be terminated as of the date of such sale.

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13. Upon the termination of this trust, the Trustees then acting shall promptly deliver all trust properties covered by this agreement into the possession of Martha Clowe, beneficiary hereunder, if she be then living, but if she be then ">*256 dead, to her children, if any, in equal portions, but if the said Martha Clowe shall die without leaving children, then said trust properties shall be delivered by said Trustees to her heirs at law. At the time of surrendering and delivering such trust properties to the beneficiary or beneficiaries herein named, the Trustees shall render to such beneficiary or beneficiaries a complete statement of all trust properties and a final accounting of the trust.

The trustees have never sold any of the stock of Clowe & Cowan, Inc.

">*1469 The parties have stipulated that the value of the common stock of Clowe & Cowan, Inc., at the date of the death of the decedent, was $ 235 a share.

The decedent, for many years, was engaged in the business of distributing and selling at wholesale plumbing, heating, air conditioning, mill, industrial irrigation, and gin supplies and associated lines. The principal part of the business was located at Amarillo, Texas, and other places of business were at Lubbock and Plainview, Texas, and Roswell, New Mexico. The decedent and John Cowan started the business as an equal partnership and incorporated it in October 1928, each owning one-half of the 1500 shares">*257 of stock. The stock was increased on June 1, 1937, to 2450 shares by a capitalization of paid-in surplus. The record does not show exactly how the stock was held after that increase but 400 shares were sold to four employees, Martha held some shares, and the principal stockholders were the decedent and Cowan. A few more shares were sold to two other employees prior to August 1946. The decedent was the president of the corporation and was very active in its affairs until his death.

The total gross estate reported on the estate tax return was $ 159,636.48, the largest item of which was $ 108,703.34 representing 366 1/6 shares of preferred stock and 327 2/3 shares of the common stock of Clowe & Cowan, Inc. No transfers during the decedent's lifetime were reported. The deductions claimed were $ 25,367.36.

The Commissioner, in determining the deficiency, added $ 125,000 to the net estate as disclosed by the return with the explanation "It is held that the 500 shares of common stock of Clowe and Cowan, Inc., Amarillo, Texas, allegedly given in trust on November 18, 1937, for the benefit of Martha Clowe Dickinson, daughter of decedent, are includible in the gross estate and taxable">*258 under the provisions of section 811 of the Internal Revenue Code; * * *." He also held that the value of the common stock of Clowe & Cowan, Inc., was $ 250 per share.

OPINION.

The petitioner claims that the attempted transfer of the remainder interest to others than Martha is void because it violates the common law rule against perpetuities applicable in Texas, but the provisions of the instrument transferring interests to Martha are valid, with the result that a fee simple interest was transferred to her and there was no transfer subject to any change within the meaning of section 811 (d) (1). The validity of the instrument has never been challenged in Texas. The Commissioner sees no violation of the rule against perpetuities in any part of the trust instrument. The trust instrument indicates that the grantor was thinking primarily of Martha when he created the trust. Nevertheless, his next ">*1470 concern was for her children. The rule is that an attempted transfer of a future interest is void unless the interest must vest within a life in being at the time of the transfer and 21 years thereafter. Brooker v. Brooker, 130 Tex. 27">130 Tex. 27, 106 S.W.2d 247, 254.">*259 A remainder interest is vested when the person who is to succeed to that estate is in existence and is ascertained and the event, which by express limitation will terminate the precedent estate, is certain to happen. 2 Tiffany, Real Property (3d ed.), par. 319. The termination of the trust is an event, certain to happen, which by express limitation will terminate the precedent estate. Martha had heirs and, later, children in existence ready to succeed to the remainder if she should die. The only question on this point is -- when will the ones who are actually to succeed to the remainder become ascertainable.

The petitioner contends that they can not be ascertained until the termination of the trust and the vesting of the remainder interests is thus dependent, not upon the life of any person, but upon a period of time which might be longer than 21 years. It argues that the persons who are named to succeed to the remainder are either Martha's children living at the termination of the trust or her heirs to be determined at that time. It points to the repeated use of the word "then" in the first sentence of paragraph 13 of the trust instrument to show that the remainder interests">*260 are to go to the children of Martha living at the time of the termination of the trust rather than to her children living at the time of her death. The remainder interests will necessarily vest at Martha's death and well within the rule if the remainder interests are to go, at the termination of the trust, to her children living at the time of her death, or if none, to her heirs determinable as of that time.

The trust instrument is not entirely clear and specific on a number of points, including this one. The trust may continue after Martha's death but the grantor did not say what is to be done with the income during that period or that the Clowe & Cowan, Inc., stock may be sold during that period. A court of competent jurisdiction will probably direct payment of the income and authorize or approve a sale during that period in order to effectuate the trust, if any occasion arises. But, however that might be, nevertheless, the instrument gives others than Martha an interest in the remainder. The dominant underlying principle in all such cases is to carry out the intention of the grantor gathered from the words used in the instrument. Here the grantor obviously intended to give">*261 the remainder interests to Martha's children, or to her heirs, under certain circumstances and if this sentence of paragraph 13, ambiguous and indefinite as it is, can be interpreted fairly to carry out that intent legally, such an interpretation is to be favored over one which would result in a violation of the rule against perpetuities and which would thus completely frustrate the grantor's efforts to give the remainder interests to those children, or to those ">*1471 heirs, under any circumstances. Rust v. Rust, 211 S.W.2d 262, affd. 147 Tex. 181">147 Tex. 181, 214 S.W.2d 462; 130 Tex. 27">Brooker v. Brooker, supra;Boyd v. Frost Nat. Bank, 145 Tex. 206">145 Tex. 206, 196 S.W.2d 497, 503.

The sentence easily lends itself to the interpretation that the property is to go to Martha upon the termination of the trust, if she is then living, but, in case her death occurs before the termination of the trust, all of her children who survive her, or, if none, her heirs at her death, are identified as the persons to take the trust properties upon the">*262 later termination of the trust. Indeed, that interpretation seems more natural and less forced than that urged by the petitioner, having in mind the entire instrument. Furthermore, the surrounding circumstances disclosed in the record tend to support that same conclusion. A court of competent jurisdiction in Texas would probably hold that this trust instrument does not in any way violate the rule against perpetuities. Cf. Rust v. Rust, supra.This conclusion takes away the basis for a large part of the petitioner's argument.

The decedent was a trustee and had the power, in conjunction with the other two trustees, to terminate the trust at the end of 10 years, or any time thereafter, by selling the Clowe & Cowan, Inc., stock. He died 15 months before the end of the first 10-year period of the trust. Thus, the extent of his power to terminate the trust at the date of his death was to combine with the other trustees in a sale of the stock which would terminate the trust, not immediately, but 15 months thereafter on November 18, 1947. The ultimate question is whether that power subjected the enjoyment of the transferred properties to a change ">*263 within the meaning of section 811 (d) (1). The power did not subject to any change the enjoyment of the estate of Martha in the income for 25 years or for life, whichever is shorter. That interest could not be diminished by the grantor and no reason for taxing it as a part of the decedent's estate has been advanced. Estate of Milton J. Budlong, 7 T.C. 756, 763-4, modified 165 F.2d 142; Estate of Charles M. Thorp, 7 T.C. 921, affd. 164 F.2d 966, certiorari denied 333 U.S. 843">333 U.S. 843. See also DuCharme's Estate v. Commissioner, 164 F.2d 959, result changed for other reasons 169 F.2d 76. The only enjoyment which was subject to any power to change was the enjoyment of the remainder interest after that estate. The enjoyment of that remainder interest was subject to this change -- if the Clowe & Cowan, Inc., stock was sold during the life of Martha, then the children and heirs would be cut off entirely and Martha would take the whole estate provided she lived until November 18, 1947, ">*264 whereas they had a chance to take the remainder interest as long as no sale was made during the life of Martha.

Section 811 (d) (3) provides that, for the purpose of subsection (d), the power to revoke shall be considered to exist on the date of the decedent's death even though the exercise of the power is subject to a ">*1472 precedent giving of notice or even though the revocation takes effect only on the expiration of a stated period after the exercise of the power, whether or not on or before the date of the decedent's death notice has been given or the power has been exercised. That provision renders immaterial here the fact that a sale during the decedent's lifetime would not terminate the trust until November 18, 1947, 15 months after his death. Cf. Mellon v. Driscoll, 117 F.2d 477, certiorari denied 313 U.S. 579">313 U.S. 579; Estate of Paul Loughridge, 11 T.C. 968, affd. 183 F.2d 294, certiorari denied 340 U.S. 830">340 U.S. 830; Commissioner v. Newbold's Estate, 158 F.2d 694; Commissioner v. Holmes' Estate, 326 U.S. 480">326 U.S. 480.">*265 The petitioner argues that the trustees could only sell if they deemed a sale for the best interest of Martha and that made the power contingent upon an event beyond the control of the decedent. However, that argument was answered adversely to the petitioner in Estate of Cyrus C. Yawkey, 12 T.C. 1164. See also Estate of Albert E. Nettleton, 4 T.C. 987, 992; 42 Tex. Jur., pp. 711-712, section 96, and Nations v. Ulmer, 122 S.W.2d 700, 703. The argument that the decedent had merely the power of sale and not the power to terminate has been answered unfavorably to the petitioner in Estate of Paul Loughridge, supra;Estate of Charles M. Thorp, supra;Estate of Edward L. Hurd, 6 T.C. 819, affd. 160 F.2d 610. The case of Estate of Mary H. Hays v. Commissioner, 181 F.2d 169, is distinguishable on the fact that here Martha did not receive a fee simple estate since she received only a contingent interest in the remainder. The power of the decedent">*266 over the remainder was of the kind described in section 811 (d) (1). 326 U.S. 480">Commissioner v. Holmes' Estate, supra;Estate of Charles M. Thorp, supra.The value of Martha's estate in the income should be subtracted from the agreed value of the stock and the remainder included in the gross estate. No further adjustment under section 811 (d) (3) is appropriate.

Decision will be entered under Rule 50.