1949 U.S. Tax Ct. LEXIS 277">*277
Remote possibility that a deecdent-settlor of a trust might survive stepchildren and their issue, named by her as trust beneficiaries, and thus result in trust property reverting to her prior to her death,
12 T.C. 172">*172 The Commissioner determined a deficiency in Federal estate tax liability 1949 U.S. Tax Ct. LEXIS 277">*278 against the estate of Martha M. Tremaine in the amount of $ 59,809.45.
The sole question submitted for our decision is whether property transferred to the trust prior to the enactment of the Revenue Act of 1924 on June 2, 1924, having a value at the date of decedent's death of $ 181,304.31, should be included in the gross estate of the decedent under
FINDINGS OF FACT.
The decedent, Martha M. Tremaine, died testate on September 13, 1942, a resident of Cuyahoga County, Ohio. Petitioner, the Cleveland Trust Co., is the duly appointed, qualified, and acting executor of the estate of the decedent, having been appointed executor by the Probate Court of Cuyahoga County, Ohio.
On December 30, 1919, the decedent established a trust with the Cleveland Trust Co., of Cleveland, Ohio, as trustee, which has been known as and is sometimes herein referred to as the Martha M. Tremaine Trust No. 1. The original trust agreement, which is included herein by reference, provided in part as follows:
* * * *
During my life the Trustee, whenever practicable, shall secure my written approval to all sales, exchanges, purchases or re-investments which it 1949 U.S. Tax Ct. LEXIS 277">*279 may propose to make. Every sale, exchange, purchase or reinvestment made with such approval shall be deemed a proper sale, exchange, purchase or investment, and except for fraud or bad faith, no claim shall be asserted against the Trustee should loss result from such sales, exchanges, purchases or investments made under such approval.
* * * *
12 T.C. 172">*173 This settlement may be revoked or the terms thereof modified by me only upon the written consent of my husband, B. G. Tremaine. Subject to such consent, I reserve the right at any time prior to distribution of the trust estate to revoke the settlement hereby evidenced, either in whole or in part, as well as the right to modify in any respect the terms of this settlement, any such revocation or modification to be evidenced by written instrument signed by me and delivered to the Trustee and bearing the written consent of my husband, B. G. Tremaine. To whatever extent this settlement shall be so revoked, the Trustee shall thereupon transfer and deliver to me such part or all of the property comprising the trust estate as may have been withdrawn under such revocation, conditioned, however, upon my repaying any advances made by the Trustee1949 U.S. Tax Ct. LEXIS 277">*280 and satisfactorily indemnifying it against any liabilities incurred by it in the execution of this trust.
The trust estate shall be treated as composed of six (6) portions, to be held for the benefit of my step-children, Gretchen Tremaine, Carl Tremaine, Bertine Tremaine Hayes; Burton G. Tremaine, Jr., H. Allen Tremaine and Warren Tremaine, share and share alike, and the net income derived from each child's portion shall be paid to such one until distribution of principal of such portion be made; provided, however, that until each child attains the age of thirty-five (35) years, and in case I be still surviving, such income shall be paid to me, to be mine absolutely, hereby reserving unto myself such income until each child attains the age of thirty-five (35) so long as I may survive during such period, and during such period the Trustee may permit stocks belonging to the trust estate to stand of record in my name, allowing me to directly receive the income and exercise the voting privileges thereon, and provided further, that in event of my death prior to each such child attaining said age of thirty-five (35) years, and in case my husband be still surviving, such income, until each1949 U.S. Tax Ct. LEXIS 277">*281 such child attains the age of thirty-five (35) years or the death of my husband prior thereto, shall be paid to him, to be his absolutely.
Conditioned upon each child's attaining the age of thirty-five (35) years, the share of the trust estate held for his or her benefit shall be paid over and distributed, to be his or hers absolutely. Such payments and disbursements shall be made irrespective of whether or not I be at such time surviving; provided, however, that the right is hereby conferred upon the Trustee to defer making such distributions in whole or in part to any child until such time or times as the Trustee in its discretion believes the making of the same to be for the best interests of each such child, having regard to his or her habits of life and ability to manage property.
* * * *
In event of the death of any child prior to complete distribution of the share held for his or her benefit, the said share, or so much thereof as may remain undistributed, shall vest in the surviving issue of such child, and in default of issue, shall be added equally to and become parts of the shares held hereunder for the benefit of the other children, to be held and disposed of upon the 1949 U.S. Tax Ct. LEXIS 277">*282 same trusts herein set forth for their respective shares.
In case of the death of any such child prior to distribution and in event my husband, Burton G. Tremaine, shall be still surviving, the income otherwise payable to such child had he or she continued to survive, shall be paid to my said husband during the residue of his life.
* * * *
12 T.C. 172">*174 By modifications made under the donor's reserved power, the trust was modified or amended on the following dates: July 22, 1921; December 2, 1921; January 23, 1923; March 5, 1925; and March 25, 1926.
The modifications of the trust agreement executed on July 22, 1921, amended the original agreement in the following respect:
* * * *
Having provided that distribution of principal of each stepchild's share shall be made to each such one upon attaining the age of thirty-five (35) years, subject, however, to the right conferred upon the Trustee to defer making such distributions according as it may deem for the best interests of each child, and desiring to make further provision for my husband, B. G. Tremaine, I do therefore now provide that such distributions of principal to each step-child upon attaining the age of thirty-five (35) years shall1949 U.S. Tax Ct. LEXIS 277">*283 not be made in case my husband, B. G. Tremaine be at such time or times surviving, but distributions thereof shall be postponed so long as he may live and the net income derived therefrom paid to him during the rest of his life, or until such time prior thereto as he may relinquish such life estate and direct distributions to be made.
* * * *
The modification of the trust agreement executed on March 25, 1926, amended the original trust agreement to provide that "The entire net income from said trust estate shall be paid to me [settlor] during the remainder of my life, or until I shall relinquish the same, to be mine absolutely."
The modifications of December 2, 1921, January 23, 1923, and March 5, 1925, dealt solely with the disposition of certain real property, included in the trust assets and gave certain beneficiaries the right to purchase the same or to take it as part of their distributive share. These modifications are not material to the issues here involved.
The executor elected to have the gross estate of the decedent valued as of the date of decedent's death. On the date of decedent's death, the net value of the property comprising the Martha M. Tremaine Trust No. 1 trust1949 U.S. Tax Ct. LEXIS 277">*284 estate was $ 399,672.59. Of the said property held by the trustee at the time of the decedent's death, property having a value at the date of decedent's death of $ 181,304.31 constituted property transferred by the decedent to the trust prior to the enactment of the Revenue Act of 1924 on June 2, 1924, or proceeds and reinvestments of property so transferred. Of such property held by the trustee in the aforesaid trust estate at the time of the decedent's death, property having a value at the date of decedent's death of $ 219,397.60, less accrued taxes of $ 1,029.32, or a net value of $ 218,368.28, constituted property transferred by the decedent to the 12 T.C. 172">*175 trust after the enactment of the Revenue Act of 1924 on June 2, 1924, or the proceeds or reinvestments of property so transferred.
Decedent, at the time of her death, had attained the age of 68 years and was survived by her husband, Burton G. Tremaine, who was born October 14, 1863, and by the following stepchildren, stepgrandchildren, and stepgreat-grandchildren, of whom all were lineal descendants of the decedent's husband, B. G. Tremaine: Burton Carl Tremaine, born August 9, 1891 Bertine Amelia Tremaine1949 U.S. Tax Ct. LEXIS 277">*285 Hayes, born July 9, 1894 Burton Gad Tremaine, born August 31, 1901 Henry Allen Tremaine, born February 10, 1905 Warren Draper Tremaine, born May 27, 1906 Nancy Tremaine DeWoody, born September 4, 1916 Sally Tremaine North, born May 20, 1919 Warwick Hayes, Jr., born January 9, 1920 Bertine Hayes Harris, born February 5, 1921 Cornelia Hayes, born December 6, 1924 Burton Gad Tremaine, III, born November 19, 1922 Dorothy Tremaine, born September 17, 1927 Marjorie Boyd Tremaine, born May 18, 1933 Henry Allen Tremaine, Jr., born March 22, 1936 Diana Tremaine, born December 12, 1936 Katherine Draper Tremaine, born July 11, 1940 Charles DeWoody, born March 19, 1941 Richard D. Harris, Jr., born January 29, 1942
All of the aforesaid stepchildren were married at the time of decedent's death and three of the decedent's stepgrandchildren were married at the time of the decedent's death. Additional stepgreatgrandchildren have been born since the time of decedent's death and additional stepgrandchildren have been married since the time of decedent's death.
The petitioner has paid to the State of Ohio the amount of $ 18,740.16 representing Ohio1949 U.S. Tax Ct. LEXIS 277">*286 inheritance taxes, which amount has been allowed by the respondent in his determination of the deficiency. Section 5335-1 et seq. of the General Code of Ohio, impose an additional inheritance tax equal to 80 per cent of the basic Federal estate tax imposed by Title 3 of the Act of Congress, approved February 6, 1926, but the Ohio additional inheritance tax is to be credited with the amount of Ohio regular inheritance tax imposed by section 5331 et seq. of the Ohio General Code. The said amount of $ 18,740.16 heretofore 12 T.C. 172">*176 paid by the petitioner consisted entirely of the Ohio regular inheritance tax and no determination of the Ohio additional inheritance tax can be made until after the Federal estate tax liability is determined in this proceeding. Petitioner will be entitled to a credit against the basic estate tax equal to the amount of any Ohio additional inheritance tax which may be determined.
In his determination of the deficiency, the respondent allowed as expenses of administration certain expenses and attorneys' fees incurred by the petitioner and reasonably foreseeable on December 28, 1944. Since that date, additional costs, expenses, and attorneys' fees have been1949 U.S. Tax Ct. LEXIS 277">*287 and will be incurred by the petitioner in connection with this proceeding in an amount which will be not less than $ 1,000 nor more than $ 3,000. The exact amount of such additional costs, expenses, and attorneys' fees will be allowable as a deduction and will be stipulated by the parties in the Rule 50 computation upon the submission of proof of the amount thereof to the satisfaction of respondent.
In all the modifications of the original trust agreement the petitioner was joined by her husband, Burton G. Tremaine, who consented thereto.
The petitioner's husband, Burton G. Tremaine, had a substantial adverse interest in the Martha M. Tremaine Trust No. 1 in that he had a right to the income for life in the event that he survived his wife and the beneficiaries of the trust were all lineal descendants of him.
OPINION.
Both parties herein agree that by operation of law of the State of Ohio the corpus of the Tremaine trust would, in the event of the death of all of the trust beneficiaries and their surviving issue before the death of the settlor, revert to the settlor. Petitioner also concedes that all transfers or additions to the trust corpus made after June 2, 1924, the effective1949 U.S. Tax Ct. LEXIS 277">*288 date of the Revenue Act of 1924, are includible in the Tremaine gross estate for estate tax purposes for the reason that in that year Congress amended the estate tax statute so as to require the taxation of assets of the trust where the grantor reserved the power to alter or revoke, with or without the consent of anyone else. Since the trust instrument herein, at the date of the death of Martha M. Tremaine, contained the power to alter or revoke with the consent of her husband, the petitioner concedes that all transfers after June 2, 1924, are subject to the estate tax.
The only question remaining for the determination of this Court is as to whether or not, by virtue of the provisions of
The Commissioner relies heavily on
In 1920 Sidney M. Spiegel, a resident of Illinois, made a transfer by trust of certain stocks to himself and another. He died in 1940. During his life the trust income was to be divided among his three children; if they died not surviving him, to any of their surviving children. On his death the trust provided that the corpus was to be distributed in the same manner. But no provision was made for distribution of the corpus and its accumulated income should Mr. Spiegel survive all of his children and grandchildren. For this reason the Government has contended that under controlling state law the property would have reverted to Mr. Spiegel had he survived his designated beneficiaries.
The only material difference between the facts in that case and those in the case at bar1949 U.S. Tax Ct. LEXIS 277">*290 is that in the case at bar the decedent was a resident of Ohio, whereas in the
On the authority of
