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

• Decision Date: 10 September 1959
• Docket Number: Docket No. 65649.
• Citation: 32 T.C. 1171
• Parties: ESTATE OF ROBERT J. CUDDIHY, DECEASED, ARTHUR B. CUDDIHY AND PAUL R. CUDDIHY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

32 T.C. 1171

ESTATE OF ROBERT J. CUDDIHY, DECEASED, ARTHUR B. CUDDIHY AND PAUL R. CUDDIHY, EXECUTORS, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 65649.

Tax Court of the United States.

Filed September 10, 1959.

William L. O'Conor, Jr., Esq., and George A. Donohue, Esq., for the petitioners.

Samuel B. Sterrett, Esq., for the respondent.

Held, no part of the corpus of the trust created by the decedent's wife in 1926 is includible in the decedent's gross estate under section 811(c)(1)(B), I.R.C. 1939, because the transfer in trust was made prior to March 4, 1931. Held, further, that the decedent, prior to his death, had relinquished all rights in the trust including any rights to income and possession or enjoyment of the property and consequently section 811(c)(1)(B) is not applicable.

OPINION.

WITHEY, Judge:

Respondent determined a deficiency in estate tax in the amount of $207,519.93 for the Estate of Robert J. Cuddihy, Deceased.

The issue presented for our decision is the correctness of the respondent's action in determining that the value of one-half of the principal of the Emma F. Cuddihy Trust is includible in the decedent's gross estate under section 811(c)(1)(B) of the Internal Revenue Code of 1939.

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

Robert J. Cuddihy died on December 22, 1952. On March 22, 1954, a Federal estate tax return for the estate of Robert J. Cuddihy was filed with the director of internal revenue for the Upper Manhattan district of New York.

On May 20, 1926, the decedent created an inter vivos trust and transferred thereto 25,010 shares of the capital stock of Funk & Wagnalls Company, with the provision that one-half of the income was to be paid to his wife for life and the other half was to be paid to his issue per stirpes. Upon termination the remainder was to be paid to the decedent's surviving issue per stirpes. The trust was to continue until the death of two designated grandchildren of the decedent. However, the trust was terminable in favor of the decedent's issue by the trustees with the consent of a majority in interest of the income beneficiaries. The wife and the three sons of Robert J. Cuddihy were appointed trustees.

On May 20, 1926, Emma F. Cuddihy, wife of the decedent, created a similar trust to which she transferred 24,528 shares of Funk & Wagnalls Company stock. The provisions of this trust were practically identical with those of the trust created by Robert J. Cuddihy, for the decedent was to receive one-half of the income during his life and the other half was to be paid to his issue per stirpes, with the remainder also transferable to the children. This trust likewise was terminable in favor of the issue of the decedent by the consent of a majority of the income beneficiaries. Each trust was created in consideration of the other.

Robert J. Cuddihy and his wife had seven children living at the time of the creation of the trusts and at the time of the death of the decedent.

On November 24, 1941, the decedent and his wife each resigned as trustee. Emma F. Cuddihy died on June 2, 1944.

In an instrument executed May 15, 1946, the decedent released his right to consent to the termination of the Emma F. Cuddihy Trust.

On February 7, 1949, the decedent waived any possible interest, reversionary or otherwise, which he might possibly have in the corpus of either trust and specifically assigned any such interest to a charitable organization.

On April 8, 1949, Robert J. Cuddihy by instrument released his right to receive income from the Emma C. Cuddihy Trust and specifically released any and all rights which he might then possess under that trust in consideration of the receipt of $49,000.00, $7,000.00 of which was paid to him by each of his seven children. The cash consideration in the amount of $49,000.00 received by the decedent represented approximately the commuted value of his right to one-half the income from the Emma F. Cuddihy Trust, based upon his age on April 8, 1949, and computed in accordance with the valuation table contained in the respondent's estate tax regulations.

Robert J. Cuddihy received no further distribution of income from the trustees of the Emma F. Cuddihy Trust after April 8, 1949, and from that date until his death all of the trust income was distributed equally to his children.

The value of the capital stock of Funk & Wagnalls Company on December 22, 1952, was $40 per share.

The respondent has taken the position that the value of one-half of the corpus of the Emma F. Cuddihy Trust is includible in the gross estate of Robert J. Cuddihy under section 811(c)(1)(B) of the Internal Revenue Code of 1939,¹ because the decedent had retained for his life the possession or enjoyment of, or the right to one-half of the income from, the trust property.

The petitioner does not deny that the decedent is to be regarded as the settlor of the Emma F. Cuddihy Trust under such decisions as Lehman v. Commissioner, 109 F.2d 99, affirming 39 B.T.A. 17, certiorari denied 310 U.S. 637; Oliver v. Commissioner, 148 F.2d 210, affirming per curiam a Memorandum Opinion of this Court, and Hill's Estate v. Commissioner, 229 F.2d 237, affirming 23 T.C. 588, which hold that where one person creates a trust for another in consideration of the creation by the other of a similar trust for him, the nominal beneficiary who furnished the consideration for the creation of the trust is the settlor of that trust. The petitioner contends however (1) that since the Emma F. Cuddihy Trust was created prior to March 4, 1931, it is specifically excluded from the operation of section 811(c)(1)(B) by the last sentence of section 811(c), and (2), in any event, section 811(c)(1)(B) is not applicable because prior to his death the decedent had relinquished all rights in the trust, including any rights to income and possession or enjoyment of the property.

The last sentence of section 811(c) provides that ‘(s)ubparagraph (B) shall not apply to a transfer made before March 4, 1931.’ This provision on its face appears clearly to exclude from the operation of section 811(c)(1)(B) a transfer in trust made on May 20, 1926. The respondent maintains, however, that ‘a transfer’ in trust cannot be ‘made’ before March 4, 1931, where, as here, the trust was terminable with the grantor's consent. The respondent asserts that ‘a transfer’ within the meaning of the last sentence of section 811(c) did not take place until May 15, 1946, when the decedent by instrument released his right to join in the termination of the trust. The respondent has here advanced an elaborate argument based upon the legislative and judicial history of section 811(c)(1).

Tracing his argument briefly, the respondent first points to the decision of the Supreme Court in May v. Heiner, 281 U.S. 238, in which it was held under the Revenue Act of 1918, requiring the inclusion in a decedent's gross estate of any property transferred during his lifetime ‘intended to take effect in possession or enjoyment at or after his death,‘ that an irrevocable transfer in trust under which the decedent-settlor had retained a life interest was not includible in his estate. In March 1931 Congress passed a joint resolution (46 Stat. 1516) amending the estate tax provisions by prospectively providing that a transfer of property subject to a life interest reserved in the transferor is includible in his gross estate. Transactions involving transfers of property occurring prior to 1931, of course, were governed by the holding of the Supreme Court in May v. Heiner, supra. In 1949, however, the Supreme Court in Commissioner v. Church, 335 U.S. 632, overruled its previous holding in May v. Heiner, supra, with the result that pre-1931 transactions involving a transfer of property subject to a life interest were made subject to inclusion in the gross estate. Congress, in the Technical Changes Act of 1949, thereupon added the last sentence of section 811(c) of the 1939 Code, which provided that section 811(c)(1)(B) should not apply to ‘a transfer made prior to March 4, 1931.’ The congressional purpose underlying the enactment of the exemption contained in the last sentence of section 811(c) was the protection of decedents who had relied upon the decision of the Supreme Court in May v. Heiner, supra, with respect to pre-1931 transactions. S. Rept. No. 831, 81st Cong., 1st Sess., 1949-2 C.B. (Part 2) 289, 293. The respondent accordingly contends that the exemption provided by the last sentence of section 811(c) is inapplicable to any transfer of property other than one which is identical to that involved in May v. Heiner, supra, and, therefore, a transaction, to be eligible under that exemption, must not be revocable or terminable by the transferor.

In support of his position, the respondent relies upon the decision of the United States Court of Claims in Smith v. United States, 139 F.Supp. 305. The transaction there involved was a trust created in 1923 under which the decedent reserved the right to income for life. The decedent's husband, one of two trustees, was given power in his sole discretion to modify or revoke the trust. Further, the settlor, jointly with her husband, could modify, terminate, or revoke the trust. The Court of Claims, in a three to two decision, held that the last sentence of section 811(c), exempting ‘a transfer made prior to March 4, 1931,‘ refers only to an irrevocable transfer in trust, and that since the decedent needed only to obtain the consent of her husband (who had no adverse interest) in order to revoke the trust and recover the property, the transaction was not ‘a transfer’ within the meaning of the exemption provided in section 811(c). In so holding, the majority opinion relied in part upon several gift tax cases which hold that a transfer of property is incomplete for purposes of creating a taxable gift if the transferor retained a power of revocation over the...