64 T.C. 1049">*1049 The Commissioner determined a deficiency in decedent's Federal estate tax in the amount of $ 304,482.07. Both parties have made certain concessions, and the principal issues remaining for decision are the following:

(1) Did decedent, in respect 1975 U.S. Tax Ct. LEXIS 67">*68 of property which she transferred in trust, retain an interest therein which would require the inclusion of its value in her gross estate pursuant to section 2036(a)(1), I.R.C. 1954?

64 T.C. 1049">*1050 FINDINGS OF FACT

The parties have filed a stipulation of facts which, together with the accompanying exhibits, is incorporated herein by this reference.

Marguerite M. Green (decedent) died testate on October 22, 1971, at Palm Beach, Fla. She was born on February 9, 1889. Virginia Green Paul, decedent's daughter, and Francis W. Green, Jr., decedent's son, were, respectively, executrix and executor of decedent's will. At the time of filing the petition herein Virginia resided in Palm Beach, Fla.; Francis, Jr., resided in Darien, Conn.

Decedent's husband died in 1963. Sometime thereafter, in 1965 or 1966, she moved her residence from Bay Shore, Long Island, New York, to Palm Beach, Fla., where her daughter, Virginia Paul, and Virginia's husband, John Paul, already resided. For some years prior thereto decedent had from time to time sojourned in Palm Beach. John Paul was an attorney and had practiced law in Palm Beach since about 1940.

1. The trust property. -- Under date of December 6, 1966, decedent, 1975 U.S. Tax Ct. LEXIS 67">*69 who was then 77 years old, and the First National Bank in Palm Beach (the bank) executed a document entitled "Trust Agreement" which had been prepared for decedent by John Paul's law firm pursuant to his discussions with her. She had had a checking account at that bank "off and on" for a number of years. By virtue of the Trust Agreement, decedent created an irrevocable trust, the bank being trustee, to which she transferred shares of stock in some seven or eight publicly held corporations. These securities had an aggregate fair market value of approximately $ 712,100, and constituted the great bulk of her wealth. Her remaining assets (some of them income producing) then amounted to about $ 125,000 and consisted primarily of several bank accounts and other liquid assets plus some personal property such as jewelry and household furnishings. She also had rights to social security benefits and medicare benefits which covered approximately 80 percent of her medical expenses. The principal block of stock among the securities transferred consisted of 7,944 shares of Avon Products, Inc., which had a then fair market value of about $ 685,485. The creation of the trust was prompted, in 1975 U.S. Tax Ct. LEXIS 67">*70 part at least, by the difficulties that the decedent was experiencing in keeping her financial affairs in an orderly fashion, due to her poor eyesight and her frequent travels.

64 T.C. 1049">*1051 The Trust Agreement provided in part as follows:

2. The Trustee shall advance to the Grantor from the corpus of this Trust the sum of FIFTY THOUSAND DOLLARS ($ 50,000), to be used by the Grantor for the purchase of a home for herself if she so chooses.

3. The Trustee shall distribute to or for the benefit of the Grantor during her lifetime, so much of the corpus each year which, when added to the net income from the Trust corpus, will equal, but not exceed, the sum of TWENTY-FIVE THOUSAND DOLLARS ($ 25,000), if, in the discretion of the Trustee, such amount is deemed necessary for the health, welfare and happiness of the Grantor considering any and all income the Grantor may have from other sources.

* * *

6. The Trustee shall have the power to treat as income any property received as or in the nature of a dividend or interest, and any property which it may determine to have been received in lieu of a dividend or interest, including any such property which might otherwise be determined to be principal; and likewise 1975 U.S. Tax Ct. LEXIS 67">*71 to treat any such property wholly or in any part as principal to any extent it may deem proper and which may be lawful.

The Trust Agreement did not otherwise provide for the distribution of any income or principal during decedent's life. Upon her death, the trustee was directed to pay $ 15,000 to the Sisters of St. Joseph for St. Joseph's Home, a charitable organization; the balance of the corpus was payable in equal shares to her children, Virginia Paul and Francis Green, Jr., their respective shares being payable to their surviving issue or to their estates in the event either of them predeceased their mother.

The trustee was a national bank which, in addition to its trust business, engaged in commercial banking and other typical banking activities. Neither decedent nor either of her two children were stockholders, directors, or officers of the bank. The bank was near decedent's apartment, and both prior to and after the execution of the Trust Agreement, decedent maintained a checking account at the bank.

Decedent did not deal directly with the bank in connection with the establishment of the trust. After the Trust Agreement had been prepared by John Paul's law firm and read to 1975 U.S. Tax Ct. LEXIS 67">*72 her by her son, she signed it. At that point neither she, nor her son-in-law, nor her children had had any conversation or other communications with the bank about the trust, its provisions, or its administration; the bank was at that time unaware of the existence of the Trust Agreement, and it had no knowledge of its terms or the corpus.

64 T.C. 1049">*1052 The bank first became aware of the Trust Agreement when the decedent's son-in-law, acting upon her behalf, took the document to the bank and discussed with the head of the trust department the intended manner in which it was to be carried out, and in particular the arrangements for current distributions to the decedent. Mr. Paul explained that the decedent "lived well but not terribly extravagantly," that their "main concern was that she wouldn't ever be overdrawn at the bank," and that if she "wanted to buy something" funds would be available for that purpose. It was then understood that distributions to the decedent would be made by the bank through her checking account with the bank. The amount to be distributed, discussed by Mr. Paul and agreed to by the head of the trust department, was $ 6,000 a quarter. Mr. Paul also pointed out that although 1975 U.S. Tax Ct. LEXIS 67">*73 the trust was "over-heavy" on Avon Products, they were favorably impressed with the company, and notwithstanding its low income yield (which was not sufficient to provide for the contemplated distributions) he indicated his desire that the bank as trustee retain the stock as long as it could do so and fulfill its obligations under the trust.

With this understanding of the intended operation of the trust as explained by Mr. Paul, the Trust Agreement was executed on behalf of the bank at about that time. Thereafter, the trust was assigned for administration to Mr. Charles Penney, a trust officer at the bank, who had responsibility for administering some 230 trusts. He was instructed by the head of the trust department to make distributions to decedent of $ 6,000 per quarter, and he thereupon "set up" the trust to make such distributions, the first one to be made in March 1967. The bank did not at any time make any independent investigation to determine whether the decedent needed distributions in such amounts. It knew that the income from the trust was not sufficient to pay such amounts, and it accordingly understood that the contemplated distributions would result in the payment 1975 U.S. Tax Ct. LEXIS 67">*74 to the decedent of all of the trust's net income plus a portion of the corpus.

Decedent filed a Federal gift tax return in April 1967, for the year 1966. On that return, which also was prepared for decedent by John Paul's law firm with John Paul's knowledge and under his supervision, the amount of the taxable gift resulting from the creation of the trust was reduced by $ 144,427.56, which was identified therein as: "Value of Life Estate retained by Donor as 64 T.C. 1049">*1053 provided by Par. 3 of Trust Indenture." John Paul himself brought the return to decedent's apartment for her signature, and he thereafter filed it for her. In accordance with paragraph 1 of the Trust Agreement, which required the trustee to pay all relevant gift taxes, the bank paid the Federal gift tax ($ 85,750) shown to be due on the return. It obtained the funds for that purpose by borrowing $ 85,750 from its commercial loan department on April 17, 1967, upon the collateral of 1,500 shares of Avon Products stock taken from the trust corpus. The loan was repaid on July 17, 1969, out of the proceeds of sale of 1,000 of those shares of Avon Products.

During the period from December 6, 1966, through October 22, 1971, the date 1975 U.S. Tax Ct. LEXIS 67">*75 of decedent's death, decedent was the only beneficiary of the Trust Agreement to receive any distributions of either income or principal.

As indicated above, the bank planned to make the first quarterly distribution to the decedent in March 1967. Apparently such arrangement for quarterly distributions was not understood by the decedent, and in February 1967, she inquired of Mr. Penney, the trust officer at the bank in charge of her trust, why she had not yet received any distributions. The quarterly arrangement was explained to her, but as a result of that discussion, the bank began (in March 1967) to make distributions to her on a near monthly basis, generally in the amount of $ 2,000 a month. The distributions in fact did not exceed a total of $ 22,000 in any one year, and were as low as $ 13,520.12 during the first year. The total thus distributed to her over the entire period beginning in 1967 up to the date of her death on October 22, 1971, was substantially in excess of the total net income of the trust for that period. ¹ Also, the aggregate amount distributed to her in each of the years 1967-70, inclusive, 64 T.C. 1049">*1054 exceeded the net income of the trust for such year, and the bank 1975 U.S. Tax Ct. LEXIS 67">*76 allocated such distributions to both income and principal.

As to the year 1971, the bank made 10 monthly distributions of $ 2,000 each, the last one on October 15, 7 days prior to decedent's death. For the entire calendar year 1971 the trust received $ 25,410.80 in dividends 1975 U.S. Tax Ct. LEXIS 67">*77 and interest ($ 218.07 thereof after decedent's death), and incurred total expenses of $ 4,198.13 (allocable in part to income and in part to principal). On its monthly statements for 1971 the bank treated the entire $ 2,000 distribution for each month, except February, as having been made from income, and as to February, it allocated $ 1,437.01 to income and $ 562.99 to principal.

For the years 1967-71, the income of the trust (dividends and interest), the expenses charged against income, the net income available for distribution, and the amounts actually distributed to the decedent, are shown in summary form in the following table:

During the course of administering the trust the bank sold some portions of the corpus and reinvested the available proceeds. However, in accordance with the wishes originally expressed at the time the trust was established, the bank continued to hold a large amount of Avon Products stock (which had meanwhile had a 2 for 1 split). 1975 U.S. Tax Ct. LEXIS 67">*79 On October 22, 1971, the date of decedent's death, the corpus of the trust had a fair market value of $ 1,173,395.70 and consisted of the following items or categories of assets: 64 T.C. 1049">*1055

In the statutory notice of deficiency the Commissioner determined that decedent "retained the right to the income from $ 1,123,395.70 ² of the [trust] property, thus rendering the amount of $ 1,123,395.70, the value of the property, includable in the gross estate under section 2036 of the Internal Revenue Code."

2. The joint savings account. -- At some time in 1965, decedent underwent surgery for the removal of a tumor in the vicinity of her stomach. Although the tumor was found to be malignant, the surgeon 1975 U.S. Tax Ct. LEXIS 67">*80 advised the family that the operation had gone well and that he anticipated no future problem in respect of the removed malignancy. Decedent thereafter resumed an active life, including travel.

In 1965 or 1966 decedent moved to West Palm Beach, Fla., near her daughter and her daughter's family. In February 1967, decedent entered a hospital for surgery to remove cataracts which were interfering with her vision. The operation was not successful in improving her eyesight. She resisted wearing the heavy glasses that were prescribed for her after the operation. Following the operation she also developed glaucoma, and her vision remained very poor throughout the remainder of her life. Due to this condition it was necessary for her daughter, Virginia, to assist decedent with her correspondence and routine financial matters, such as writing checks and withdrawing money from savings accounts. With the exception of the passbook for a joint savings account, discussed below, decedent retained the possession of her passbooks and checkbooks but for those times that Virginia brought them to her own home to work on them. When this occurred, she returned them to her mother shortly thereafter.

Despite 1975 U.S. Tax Ct. LEXIS 67">*81 decedent's deteriorated vision, though, she continued to lead an active, if not vigorous, life, regularly meeting with 64 T.C. 1049">*1056 friends and visiting her family. Among her travels, she made three or four trips a year, unaccompanied, to visit her son and his family in Connecticut as well as in Vermont where he had a second home. Having decided to purchase a residence for herself, she bid on a house in Palm Beach in the spring of 1967. When the house was sold to another bidder, decedent, piqued at not being offered the opportunity of increasing her bid, went by herself for the summer to Charleston, S.C., where she had many friends. While in Charleston, she stayed at a hotel, visited her friends, dined at various restaurants, and shopped for clothes and antiques, which she collected.

On June 29, 1967, while still in Charleston, decedent opened a joint savings account at a savings and loan association in Charleston in the names of "Mrs. Marguerite M. Green or Mrs. Virginia Green Paul," entitling either woman, alone, to withdraw amounts therefrom. As the address, decedent supplied her temporary South Carolina address which she later changed to her Palm Beach, Fla., address. At the time she 1975 U.S. Tax Ct. LEXIS 67">*82 opened the account, decedent deposited $ 15,000 of her own funds in the account. Upon her return to Palm Beach in October 1967, decedent placed the passbook in the exclusive possession of Virginia Paul, saying "This is yours, Virginia, keep it." Decedent placed no restriction on Virginia's use of the funds nor was there any agreement between them that Virginia would refrain from withdrawing the deposited funds. Decedent did not give Virginia the passbooks for any of the other savings accounts which she had, one of which was also in the joint names of decedent and Virginia. Decedent's health at the time was thought by all to be good; her only medication was eyedrops.

Interest on the balance in the foregoing Charleston account, denominated as "dividends," was payable semiannually. At least through 1970 decedent received all of the interest from the account and reported it as income on her Federal income tax returns. In 1970 decedent made three additional deposits to the account totaling $ 2,321.36. Decedent did not file a gift tax return for the year 1967.

After returning to Palm Beach in October 1967, decedent lived in a hotel for about 6 weeks and resumed her search for a house 1975 U.S. Tax Ct. LEXIS 67">*83 to buy. During that time she was out either with friends or family on most days. She also subscribed to the theater on a yearly basis and attended weekly. Late in 1967 she flew to New York unaccompanied. 64 T.C. 1049">*1057 In early 1968 decedent found a condominium apartment in Palm Beach which she wished to buy. She then asked Virginia if it would be all right for her to withdraw $ 8,000 from the Charleston joint account to be used as downpayment for the condominium. Virginia thereupon effected the withdrawal for decedent on March 18, 1968. Virginia Paul did not file a gift tax return in respect of this transaction.

Decedent had made gifts to her two children numerous times in the past, consisting both of cash and securities and usually in amounts of $ 3,000 or less in any one year in respect of the particular donee.

With the exception of a brief stay in the hospital of about a week near the end of 1970, decedent lived in her condominium apartment until sometime in March 1971. While living at home, she did not have need for a nurse, although she did have a woman live with her to perform certain cleaning and cooking chores. In March 1971, decedent was admitted to the hospital for 2 to 3 weeks, 1975 U.S. Tax Ct. LEXIS 67">*84 after which she went to a nursing home where she remained until she died on October 22, 1971. She was 82 years old when she died. The cause of decedent's death was diagnosed as liposarcoma, a form of cancer. Although she had been unaware of that condition until shortly before her death, it had been present in her body for about 5 years.

On April 26, 1971, shortly after her mother had entered the nursing home, Virginia Paul closed the joint savings account and withdrew the remaining balance of $ 9,321.36 to help pay for an addition to her summer house. Neither decedent nor her estate filed a Federal gift tax return for 1971. Nor was any gift tax return filed in respect of the Charleston bank account in any other year.

On the Federal estate tax return, the value of the joint savings account was not included in the gross estate, nor was it reported as a transfer within 3 years immediately preceding death.

In the notice of deficiency, the Commissioner determined that Virginia Paul had withdrawn the balance of the joint savings account "in contemplation of death," and that therefore, "the amount of $ 9,321.36 is includable in the decedent's gross estate under section 2035 of the Internal Revenue Code."

64 T.C. 1049">*1058 1975 U.S. Tax Ct. LEXIS 67">*85 OPINION

1. The trust property. -- In late 1966 the decedent and the bank entered into a Trust Agreement under which she in fact received until her death in October 1971 periodic payments which in the aggregate were substantially in excess of the net income of the trust. The securities transferred to the bank at the time of the execution of the agreement represented her only contribution to the trust, and the only payments made by the trustee, in addition to the periodic distributions to the decedent, consisted of the expenses of the trust and the gift taxes which became due as a result of the decedent's transfer of the securities to the bank. At issue is whether decedent's interest in the trust assets amounted to such retention of the property as would require its inclusion in her gross estate by reason of Code section 2036(a)(1), the pertinent part of which provides:

SEC. 2036. TRANSFERS WITH RETAINED LIFE ESTATE.

(a) General Rule. -- The value of the gross estate shall include the value of all property 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 1975 U.S. Tax Ct. LEXIS 67">*86 money's worth), 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 * * *