Commissioner of Internal Rev. v. McDermott's Estate

• Decision Date: 27 May 1955
• Docket Number: 11155.,No. 11154,11154
• Citation: 222 F.2d 665
• Parties: COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE OF James D. McDERMOTT, Deceased, John Lawrence McDermott and Maude E. McDermott, co-executors, Respondents. ESTATE OF James D. McDERMOTT, Deceased, John Lawrence McDermott and Maude E. McDermott, co-executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Court of Appeals — Seventh Circuit

222 F.2d 665 (1955)

COMMISSIONER OF INTERNAL REVENUE, Petitioner, v. ESTATE OF James D. McDERMOTT, Deceased, John Lawrence McDermott and Maude E. McDermott, co-executors, Respondents.

ESTATE OF James D. McDERMOTT, Deceased, John Lawrence McDermott and Maude E. McDermott, co-executors, Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 11154, 11155.

United States Court of Appeals Seventh Circuit.

May 27, 1955.

H. Brian Holland, Asst. Atty. Gen., Grant W. Wiprud, Atty., U. S. Dept. of Justice, Washington, D. C., Ellis N. Slack, Robert N. Anderson, Carolyn R. Just, Sp. Assts. to Atty. Gen., for petitioners.

Frederick O. Dicus, Chicago, Ill., Chapman & Cutler, Chicago, Ill., of counsel, for respondents.

Before MAJOR, FINNEGAN and SCHNACKENBERG, Circuit Judges.

MAJOR, Circuit Judge.

In a controversy between the Commissioner of Internal Revenue and the executors of the estate of James D. McDermott relative to the estate tax owing by the latter's estate, the Tax Court, in a decision rendered August 25, 1953, sustained a deficiency in the amount of $1,487.98. This deficiency was predicated upon the value at the time of decedent's death of the corpus of certain trusts which had been previously created by the decedent. From this decision of the Tax Court the executors petitioned for a review (No. 11155). The executors, however, in this court have abandoned their petition for review and, as a result, we are not concerned with the Tax Court's decision insofar as it includes the value of the trust corpus in decedent's gross estate.

The Tax Court also decided that the income attributable to the trust property and received by the trustee subsequent to the creation of the trusts and transfer of the corpus was not includible in decedent's gross estate for estate tax purposes. The Commissioner petitions for review from this portion of the Tax Court's decision (No. 11154).

The question for decision, therefore, arises from Commissioner's contention that the Tax Court erred in holding that the value of that portion of the corpus of the trusts attributable to accumulations of income on property transferred by decedent, which income was received by the trustee subsequent to such transfer, was not includible in taxpayer's estate. The Commissioner's contention is predicated upon Sec. 811(c) (1) (B) and (d) (1), Internal Revenue Code of 1939, 26 U.S.C.A. § 811.

The major portion of the discussion by the Tax Court, including its findings of fact and conclusions of law, relates to the terms and conditions of the agreements by which the trusts were created and is material in the main to the issue raised by the executors in their petition for review, now abandoned. In a single paragraph the Tax Court disposed of the issue now for decision, as follows:

"Trust accumulations representing income on the property transferred by decedent are not includible in the gross estate. The statute, section 811(c) or (d), is only concerned with transfer, and since trust income was not transferred to the trust by decedent such accumulations as represented by income are not includible in decedent\'s gross estate. Commissioner of Internal Revenue v. Gidwitz 7 Cir., 196 F. 2d 813; affirming 14 T.C. 1263."

We do not understand there is any dispute as to any issue of fact pertaining to the question for decision and, in view of the situation as previously stated, we think there is no occasion to make more than a brief statement of the facts. On December 23, 1939, the decedent created eight separate trusts for the benefit of his wife and seven children, in each of which the decedent was designated as trustee. The trusts contained customary and ordinary provisions except that the trustee was authorized to accumulate part or all of the trust income, but any such accumulations were to be added to corpus. All beneficiaries survived the decedent, who died April 22, 1947. Upon termination, each trust provided for distribution to the principal named beneficiary, if living, with a contingent provision in the event that such beneficiary was then deceased.

The sole property transferred by the decedent to the trusts was the original corpus, consisting in the aggregate of 800 shares of stock in Olympic Commissary Company. Subsequent to the creation of the trusts and receipt by the trustee of such corporate stock, the trustee received one dividend declared on such stock, the proceeds of which were accumulated and used to purchase United States Savings Bonds. Thereafter the trusts were inactive, no other income was received, distributed or accumulated. In all the trusts except the one established for decedent's wife, the trustee was authorized to encroach upon and make distributions of corpus to the principal beneficiaries in the event the income from the trusts and from other sources was insufficient to relieve the needs of the beneficiaries arising from "accident, sickness or other emergency or unusual condition of any kind presently unforeseen." Only through the exercise of such an encroachment power could accumulations be distributed prior to termination of the trusts, but such power was never exercised by the trustee.

We think it is without dispute, at any rate the Tax Court found, "The trusts declare they are `irrevocable' and the trustee is `without power at any time to revoke, change or modify the terms hereof,'" and "In none of the trusts was there given or reserved to decedent any interest in the...