Estate of Childers v. Comm'r of Internal Revenue, Docket No. 9175.

• Citation: 10 T.C. 566
• Decision Date: 31 March 1948
• Docket Number: Docket No. 9175.
• Parties: ESTATE OF ETHEL K. CHILDERS, ROBERT L. CHILDERS AND GEORGE R. BLAKE, EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: United States Tax Court

10 T.C. 566

ESTATE OF ETHEL K. CHILDERS, ROBERT L. CHILDERS AND GEORGE R. BLAKE, EXECUTORS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 9175.

Tax Court of the United States.

Promulgated March 31, 1948.

1. Held, that by relinquishment of exclusive dominion and control and power of recapture for her own benefit and purposes, a donor, on January 10, 1936, made taxable gifts of the entire trust estate, including the shares given to the trust by two beneficiaries, and accumulated trust income.

2. Held, further, donor is not entitled to the benefits of section 501(c) of Revenue Act of 1932 as amended.

3. Held, further, the gifts made were gifts of future interests and donor is not entitled to five exclusions of $5,000 each. Joseph A. Hoskins, Esq., for the petitioners.

George E. Gibson, Esq., for the respondent.

The respondent determined a deficiency of $11,984.04 in the gift tax liability of Ethel K. Childers for the year 1936. Ethel K. Childers died on June 23, 1946, and the executors were duly substituted as the petitioner.

The issues are:

(1) Whether an amendment dated January 10, 1936, to the trust agreement of May 16, 1932, executed by the decedent, served to effect completed gifts in trust, subject to the gift tax;

(2) If so, whether gifts made to the trust by a sister and a sister-in-law of the decedent in 1933 and 1934, respectively, are includible in the total amount of gifts made by decedent on January 10, 1936; and

(3) Whether the total amount of income funds of the trust accumulated on January 10, 1946, is includible in the total amount of decedent's taxable gifts.

(4) The Commissioner, in his amended answer, alleged that he erred in allowing five exclusions of $5,000 each in determining the amount subject to gift tax in 1936 and he seeks an additional deficiency of $3,187.51 accordingly.

FINDINGS OF FACT.

The facts were stipulated. Those pertinent to the issues are as follows:

Ethel K. Childers was born October 27, 1887, and died June 23, 1946. Prior to 1932 and up to and including June 23, 1#46, she lived at Arkansas City, Kansas. On the date of her death, she was secretary and general counsel of the Kanotex Refining Co., Arkansas City, Kansas.

On May 16, 1932, Ethel K. Childers had two adopted children, Robert L. Childers, born July 13, 1922, and Dorothy Childers, born May 24, 1924. On the same date Mrs. Childers had two sisters, Bertha K. Hulser, born April 7, 1885, and Edith K. Mahaffey, born July 21, 1892, and one brother, Winfield S. Kehrer, born July 16, 1880. Matie B. Kehrer, the wife of Winfield S. Kehrer, was born about 1885 and died August 29, 1935.

On May 16, 1932, Ethel K. Childers (a single woman), as donor, executed a trust agreement, naming herself and Robert R. Cox, of Arkansas City, Kansas, as trustees. On the same day Ethel K. Childers, in accordance with the terms of the trust agreement, transferred to herself and Robert R. Cox, as trustees under the trust agreement, 799 shares of stock in the Silverdale Gravel Co. Prior to January 10, 1936, such shares were exchanged for 1,096 shares of stock in Crude Oil Pipe Line Co., the value of which on January 10, 1936, was $10,960.

The trust agreement provided, among other things, that all of the net income received from May 16 to December 31, 1932, inclusive, should be divided equally among and paid to the five designated beneficiaries, viz., Robert L. Childers, Dorothy Childers, Matie B. Kehrer, Bertha K. Hulser, and Edith M. Mahaffey, and that all the net income received after December 31, 1932, should be divided and paid one-half to the donor during her lifetime and one-fifth of the net income not paid to donor to each of the above named five beneficiaries. In the event such beneficiaries, except Matie B. Kehrer, predeceased the donor, the share of the income payable to each was to become a part of the corpus of the trust, the share of Matie B. Kehrer being payable to Winfield S. Kehrer. If any of such beneficiaries, except Edith K. Mahaffey, survived the donor but died before final distribution of the trust estate, his or her portion was payable to his or her lawful issue, if any, and if none, the portion was to become a part of the corpus. In the event of the death of Edith K. Mahaffey after the death of donor but before final distribution of the trust estate, her portion of the income was to become a part of the corpus of the trust. Clauses (c) and (d) of paragraph second of the trust agreement provided as follows:

(c) During the lifetime of the donor, the Trustees may, in their sole discretion, pay to any beneficiary only part of his or her income, the balance to be held and accumulated by the Trustees for future distribution to such beneficiary; the amount to be paid, and the time when such accumulated income is to be distributed to the beneficiary to be determined solely by the Trustees. Each income fund shall be kept separately in the accounts of the Trustees, as though a separate trust were created for each beneficiary, and on the death of an income beneficiary the accumulated income of his or her fund shall become part of the principal of the Trust Estate. The provisions of this paragraph shall apply to all income realized by this Trust, whether received during the calendar year 1932 or subsequent thereto.

(d) In case the Net Income from the Trust Estate allotted for the benefit of any beneficiary hereunder is at any time or times insufficient, in the opinion of the Trustees, for the comfort, maintenance and/or education of such beneficiary, the Trustees may pay out from time to time such sums from the principal as in their sole discretion may be necessary for such purpose or purposes.

The trust was to terminate upon the death of the donor and the entire corpus and accumulated income, ‘regardless for what accounts ;he same are held,‘ were to be divided into five equal parts and distributed to Robert L. Childers, Dorothy Childers. Matie B. Kehrer, if living; otherwise to Winfield S. Kehrer, Bertha H. Hulser and Edith K, Mahaffey, or their lawful issue.

In paragraph fourth (c), the trustees were given power to invest the trust estate in designated investments:

* * * provided, however, that during the lifetime of the Donor the Trustees may invest and reinvest the Trust Estate, or any part thereof, in the unsecured notes of any individual approved by the Trustee E. K. Childers, or in the unsecured notes or bonds of any corporation, firm or syndicate in which the Trustee E. K. Childers is at the time a stockholder, partner or member, if approved by the Donor, and the Trustees shall not be liable for any loss resulting to the Trust Estate from, or on account of, any such investments so approved by the Donor.

In addition to other powers, the trustees were empowered, in clause (e) of paragraph fourth, to determine:

* * * the mode in which expenses are to be borne as between capital and income, and may determine which moneys or property are to be treated as capital or income, which right shall include the power to determine whether any part of the actual income of any investment purchased at a premium or discount shall be treated as capital or income.

The trust agreement provided further as follows:

FIFTH: (a) Said E. K. Childers, as Trustee hereunder, may make any and all investments of the Trust Estate in her sole discretion, shall have the custody of all securities, funds and other property of the Trust Estate and shall make all payments and distributions provided hereunder, while she is such Trustee.

(b) In all matters wherein any discretion is granted the Trustees under this Agreement, the decision of the Trustee E. K. Childers shall be conclusive and binding upon both Trustees, and on all beneficiaries hereunder.

(c) (Provided for successor trustees.)

SIXTH: This agreement, and the Trust hereby created, may be altered, amended, and/or revoked, in whole or in part, at any time, and from time to time, by a written instrument signed by the Donor and one other beneficiary hereinabove named then sui juris, and in the event of the complete revocation thereof in the manner hereinabove set forth the entire corpus, and all other property or money of the Trust Estate, including all accumulated income, then in the hands, or under the control, of the Trustees shall be transferred and delivered to the Donor, and no beneficiary other than the Donor shall have any right, title or interest therein or thereunder, or to any part thereof.

On June 11, 1932, by an instrument in writing executed by E. K. Childers, donor, ‘by and with the consent of, and in conjunction with the undersigned Matie B. Kehrer, one of the beneficiaries named in the Trust Agreement ‘ of May 16, 1932, paragraph sixth of the trust agreement was amended to read as follows:

SIXTH: This agreement, and the Trust hereby created, may be altered, amended, and/or revoked, in whole or in part, at any time, and from time to time, by the Donor, in conjunction with any other beneficiary hereinabove named then sui juris and having a substantial adverse interest in the disposition of the corpus of this Trust Agreement, or the income therefrom, which alteration, amendment or revocation shall be evidenced by a written instrument signed by the Donor and such other above-described beneficiary, and in the event of a complete revocation thereof in the manner hereinabove set forth the entire corpus, and all accumulated income, and all other property or money of the Trust Estate then in the hands, or under the control, of the Trustees shall be transferred and delivered to the Donor, and no beneficiary other than the Donor shall have any right, title or interest therein or thereunder, or to any part thereof.

On January 8, 1933, the trust agreement was amended so as to reduce the participation of the donor, E. K. Childers, in the net income of the trust from one-half to one-tenth thereof and to change one of the successor trustees.

On November 15,...