Barth v. Comm'r of Internal Revenue (In re Estate of Wall)

• Citation: 101 T.C. 300,101 T.C. No. 21
• Decision Date: 12 October 1993
• Docket Number: No. 15311–91.,15311–91.
• Parties: ESTATE OF Helen S. WALL, Deceased, Kathryn H. Barth, Personal Representative, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: United States Tax Court

101 T.C. 300

101 T.C. No. 21

ESTATE OF Helen S. WALL, Deceased, Kathryn H. Barth, Personal Representative, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 15311–91.

United States Tax Court

Oct. 12, 1993.

Gordon H. Smith, Jr., for petitioner.^*

J. Paul Knap, for respondent.

OPINION

NIMS, Judge:

Respondent determined a $44,948 deficiency in the Federal estate tax due from the Estate of Helen S. Wall. The single issue for decision is whether property held by three irrevocable inter vivos trusts created by the decedent, Helen S. Wall (Mrs. Wall), is includable in her gross estate under section 2036(a)(2) or section 2038(a)(1) because in creating the trusts Mrs. Wall reserved the right to remove the sole trustee, a corporation, and appoint a successor corporate trustee. (All section references are to sections of the Internal Revenue Code in effect at the time of Mrs. Wall's death.)

All of the facts have been stipulated and are found accordingly.

At the time the petition was filed, Kathryn H. Barth, the personal representative of the Estate of Helen S. Wall (petitioner), resided in Boulder, Colorado. Mrs. Wall died on October 7, 1987, a domiciliary of Wisconsin. Petitioner was appointed personal representative by the Circuit Court of Wisconsin, Marathon County, on December 8, 1987.

Petitioner filed a Federal estate tax return (Form 706) on October 12, 1988, and a corrected Form 706 on January 16, 1989. The assets of the three trusts created by Mrs. Wall were not included as assets in the gross estate on either the original Form 706 or the corrected Form 706. However, gifts from Mrs. Wall to these trusts, in the total amount of $101,015, were included in the adjusted taxable gifts reported on the two Forms 706.

On December 19, 1979, Mrs. Wall executed three instruments establishing the three previously mentioned trusts, they being known as the Kathryn Barth Trust, the Sarah Ann Barth Trust, and the Amy Elizabeth Barth Trust, respectively.

Kathryn Barth is Mrs. Wall's daughter. Sarah Ann Barth and Amy Elizabeth Barth are Mrs. Wall's granddaughters.

Mrs. Wall transferred additional assets to the Kathryn Barth Trust in 1980. She transferred additional assets to the Sarah Ann Barth Trust and the Amy Elizabeth Barth Trust in 1984 and 1986. Mrs. Wall filed Federal gift tax returns reporting these transfers.

The trust agreement establishing the Kathryn Barth Trust provides, in part, that

The Grantor or the beneficiary, Kathryn Barth, may remove the Trustee on written notice and appoint a successor Trustee. However, any successor Trustee must be a corporation qualified to conduct a trust business in the United States and be completely independent from the Grantor.

The trust agreement also provided that “She may at her pleasure deposit additional assets.” Mrs. Wall retained no other power over or interest in the Kathryn Barth Trust.

The trust agreements establishing the Sarah Ann Barth Trust and the Amy Elizabeth Barth Trust provide, in part, that

The Grantor, during her lifetime, may substitute Trustees, but any successor Trustee shall be other than the Grantor or any firm or corporation in which the Grantor has an interest, and shall, in all events, be an independent corporate trust company.

The trust agreements provided that “Additional property may from time to time be transferred by the Grantor or by any other person.” Mrs. Wall retained no other power over, or interest in, either the Sarah Ann Barth Trust or the Amy Elizabeth Barth Trust.

Mrs. Wall had no power to appoint herself as trustee of any of the three trusts. The initial trustee of all three trusts, First Wisconsin Trust Company (First Wisconsin or the bank), has held the position of trustee of the three trusts continuously from its initial appointment to the present time. At no time during her life or by will did Mrs. Wall attempt to remove or change the trustee.

The bank is a large and reputable trust company which has been doing business in Wisconsin for over 50 years. In the operation of its trust business it is subject to the laws of Wisconsin. At no time did Mrs. Wall have any significant ownership interest in the bank.

The bank as trustee of the Kathryn Barth Trust had, among other things, the following power:

The principal and income of the trust may be expended by the Trustee in its sole discretion to or for the benefit of my daughter, Kathryn Barth, until final distribution is made as provided herein.

The Sarah Ann Barth Trust contains, among other things, the following provision:

The Trustee shall hold, manage, invest, and reinvest the trust property for the sole benefit of Sarah Ann Barth, granddaughter of the Grantor, born April 26, 1968, hereinafter called the “Beneficiary,” upon the following terms:

(a) The Trustee may distribute to, or apply for the sole benefit of the beneficiary until she attains the age of 21 years, so much of the income and principal, at such time or times and in such amounts and manner, as the Trustee, in its sole discretion, shall determine. Any amount which the Trustee shall determine not to use may be accumulated as income or may be added to the principal, as the Trustee shall deem best.

(b) When the beneficiary reaches the age of 21 years, she shall have the power, by an instrument in writing signed by her and delivered to the Trustee within six months after her 21st birthday, to compel the immediate distribution to her of all of the then accumulated income and principal of this trust. If no such instrument is delivered within the time specified herein, then the trust shall continue until the beneficiary reaches the age of 30 years. During the continued period of this trust, the Trustee shall pay to or apply for the benefit of the beneficiary all of the net trust income at least annually. During the continued period of this trust, principal may be expended by the Trustee in its sole discretion for the benefit of the beneficiary. When the beneficiary reaches age 30, the trust shall terminate and the principal and income remaining in the trust shall be distributed to her.

The Amy Elizabeth Barth Trust contains a similar provision.

The three trust agreements recite that they are to be governed by the laws of Wisconsin.

The relevant statutory provisions are as follows:

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 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—

* * *

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

SEC. 2038. REVOCABLE TRANSFERS.

(a) IN GENERAL.—The value of the gross estate shall include the value of all property—

(1) TRANSFERS AFTER JUNE 22, 1936.—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 money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate, or where any such power is relinquished during the 3–year period ending on the date of the decedent's death.

Thus, section 2036(a)(2) sweeps into the gross estate the value of any transferred property as to which the decedent has retained a singly or jointly held power to designate the person or persons who are to have possession or enjoyment of the property or the income from the property. In the case before us we must decide whether Mrs. Wall's retained power to change the corporate trustee is to be equated with a power to designate the persons who are to possess or enjoy the property or the income therefrom.

Section 2038(a)(1) requires the inclusion in the decedent's gross estate of the value of any interest in any transferred property where the “enjoyment” thereof was subject at death to any change through the exercise of a solely or jointly held power to alter, amend, revoke, or terminate. Assuming, as we think we must, that Mrs. Wall's power to change the corporate trustee was a power to alter, amend, revoke, or terminate, we must answer the question of whether this power was such that it could affect the enjoyment of the property.

Section 20.3026–1(b)(3), Estate Tax Regs., provides in part that:

if the decedent reserved the unrestricted power to remove or discharge a trustee at any time and appoint himself as trustee, the decedent is considered as having the powers of the trustee.

Petitioner argues that by negative inference this regulation is saying that if the decedent did not reserve the unrestricted power to appoint herself under such circumstances, she is not considered as having retained the powers of the trustee.

Section 20.2038–1(a)(3), Estate Tax Regs., provides in part that:

if the decedent had the unrestricted power to remove or discharge a trustee at any time and appoint himself trustee, the decedent is considered as having the powers of the trustee.

Petitioner makes the same negative inference argument as to this regulation.

In the Kathryn Barth Trust the trustee is authorized “in its sole discretion” to “expend” principal and income for the benefit of Kathryn Barth. In each of the two grandchildren trusts the trustee “in its sole discretion” may pay or apply income and principal to or for the benefit of the beneficiary while sh...