ESTATE OF MALONE v. Commissioner

Decision Date26 January 1976
Docket NumberDocket No. 4037-73.
Citation1976 TC Memo 16,35 TCM (CCH) 50
PartiesEstate of May C. Malone, Deceased, The Colorado National Bank of Denver, Administrator, C.T.A. v. Commissioner.
CourtU.S. Tax Court

Frank M. Cavanaugh, for the petitioner. Vivian T. Martinez, Jr., for the respondent.

Memorandum Findings of Fact and Opinion

WILES, Judge:

Respondent determined an estate tax deficiency of $196,262.22 against the Estate of May C. Malone (sometimes hereinafter decedent), who died on January 10, 1969. The sole issue for decision is whether the fair market value of a certain trust was includable in decedent's gross estate.

Findings of Fact

Petitioner is the Estate of May C. Malone, The Colorado National Bank of Denver, Administrator, C.T.A. (hereinafter Colorado National Bank). Colorado National Bank filed a United States Estate Tax Return, Form 706, for that estate with the Internal Revenue Service, Service Center, Austin, Texas, on April 14, 1970. The principal office of Colorado National Bank is at Denver, Colorado.

The decedent, May C. Malone, was born on May 12, 1879. She married Richard H. Malone, a domineering man, in 1910; at that time, she had $25,000 to $30,000 in separate property. May C. Malone was the second spouse of Richard H. Malone, who had three children from a prior marriage.

John C. Malone, the only child of Richard H. and May C. Malone, was born on July 1, 1916.

From 1910 through 1926, the property which May C. Malone brought into the marriage was reflected on separate books of account which showed additions from interest, dividends and rents. Income was allowed to accumulate.

Beginning about 1918, Richard H. Malone at irregular intervals transferred property to May C. Malone. Some items of property were credited to her capital account, and some were credited to her as "Trustee for John C. Malone," although there was apparently no express trust for that purpose. The bulk of these transfers occurred from 1919 to 1922. Richard H. Malone desired by these transfers to make provision for his wife and son by giving them separate property.

May C. Malone had a separate bank account from at least 1914 through at least February 18, 1937, the date of Richard H. Malone's death. In addition to the books of account maintained for her separate property, the separate character of her property was shown by safekeeping accounts and by stock issued in her own name, as for example 50 shares of Ideal Basic Industries, Inc. stock issued in her name on January 2, 1925. As early as January 8, 1923, Colorado National Bank issued a receipt for securities valued at approximately $125,000 held for safekeeping and subject to decedent's order. There is also evidence thaat she filed separate income tax returns for years prior to 1926.

A trial balance for May C. Malone as of March 31, 1926, showed the following assets:

                Cash ................  $  8,798.97
                Bills Receivable ....    12,500.00
                Bonds ...............    61,320.58
                Olympia .............     3,933.33
                Real Estate .........    43,778.21
                Stocks ..............   176,773.96
                Stocks & Bonds Trust
                 Account ............    54,570.26
                May C. Malone for
                 J. C. M. ...........               $ 54,570.26
                Dividends ...........                  2,154.50
                Interest ............                    670.98
                May C. Malone
                 (personal) .........                     42.00
                May C. Malone—Capital                304,237.57
                                       ___________  ___________
                                       $361,675.31  $361,675.31
                

The fair market value of her assets on that date was $361,675.31, in contrast to a book value of $250,217.75.

On July 6, 1926, May C. and Richard H. Malone executed a Memorandum of Agreement in which May C. Malone disclaimed any interest in a trust Richard H. Malone created on that date for the children of his first marriage. Colorado National Bank was trustee of that trust. In consideration for this disclaimer, May C. Malone acknowledged receipt of securities valued at $250,594.54 for her own benefit and receipt of securities valued at $54,570.26 as trustee for John C. Malone. A copy of the March 31, 1926, trial balance was attached to the Agreement. That trial balance, set forth above, showed as of March 31, 1926, that May C. Malone was holding $54,570.26 for John C. Malone as trustee; furthermore, the aggregate of Bills Receivable ($12,500.00), Bonds ($61,320.58), and Stocks ($176,773.96) equaled the consideration stated in the agreement of $250,594.54.

On July 25, 1927, May C. Malone created a trust "for the use and benefit of her husband, Richard H. Malone, and their son, John C. Malone." Corpus consisted entirely of property standing in the name of May C. Malone prior to July 6, 1926 and at creation of the trust. Colorado National Bank was also trustee of this trust.

Net income was to be paid half to May C. Malone and half to Richard H. Malone so long as they live. No investment was permitted without the approval in writing of May C. Malone and, during his lifetime, Richard H. Malone. May C. Malone could modify or revoke the trust with Richard H. Malone's written consent, but she retained no such power after his death.

The 1927 trust was amended four times between 1927 and 1931; all four amendments refer solely to decedent as creator of that trust.

On June 29, 1933, May C. Malone executed a trust agreement with Colorado National Bank which provided, in part, as follows:

WITNESSETH:
THAT, WHEREAS, May C. Malone, named Donor therein, heretofore by virtue of a certain written Trust Agreement dated the 25th day of July A.D. 1927, created a Trust for her husband and their son, John C. Malone, which said written Trust Agreement was known and numbered on the books and records of the Trust Department of the said Colorado National Bank as Trust Agreement No. 2944 * * *
* * *
WHEREAS the Creator, May C. Malone, desires with the consent in writing of Richard H. Malone, which consent is evidenced by the signing hereof by said Richard H. Malone, to change, modify and alter the terms and provisions of said Trust Agreement No. 2944 and also the said modifications thereof heretofore made, in certain particulars, and also desires to revoke in whole the said Trust Agreement No. 2944 and revoke in whole the said modifications thereof made thereto and it is deemed and decided best that such alterations, modifications and changes had best be made by means of a revocation of said original Trust Agreement No. 2944 and the modifications thereto and a new and complete Trust Agreement made in lieu thereof, and
WHEREAS the Creator hereof, May C. Malone, desires with the consent in writing of Richard H. Malone, said consent evidenced as aforesaid, to create a new Trust Agreement upon the terms and conditions herein set forth.
NOW, THEREFORE, In consideration of the premises and for the purposes of accomplishing the objections herein more particularly set forth, the Creator hereof, May C. Malone, with the written consent of Richard H. Malone evidenced as aforesaid, has revoked, cancelled and annulled in whole and does hereby revoke, cancel and annul said Trust and said Trust Agreement known and numbered as Trust Agreement No. 2944 and the modifications thereof and does hereby publish and declare this written agreement is a new Trust Agreement in the place and stead of said Trust Agreement No. 2944 and the modifications thereof * * *
* * *
No beneficiary shall have the right or power to transfer, assign, anticipate, or encumber his or her interest in said Trust Estate or the income therefrom prior to the actual distribution thereof by the Trustee as to such beneficiary. * * *
In the event that any of the beneficiaries hereunder shall attempt to alienate or dispose of any of the income or principal to which he or she shall be entitled under this Trust Agreement, prior to distribution * * * then the trust expressed in this Agreement concerning so much thereof as might vest in such other person or persons shall immediately cease and determine. * * * Emphasis added.

That same day, May C. and Richard H. Malone executed a Memorandum of Agreement which reaffirmed the disclaimer agreement of July 6, 1926, insofar as a new trust executed on June 29, 1933, was substituted by Richard H. Malone for the trust he created for the children of his first marriage.

On July 17, 1933, the 1927 trust instrument was stamped "CANCELLED" in large letters on its first and last pages.

On February 26, 1936, the 1933 trust was amended by May C. Malone, with the written consent of Richard H. Malone. The Amendment of Declaration of Trust Agreement provided, in part, as follows:

WHEREAS, by a certain declaration of trust agreement dated June 29, 1933, May C. Malone, therein and hereinafter designated "Creator," by agreement with The Colorado National Bank of Denver, Colorado, as Trustee, deposited certain property, now held by said Trustee under the terms thereof;
AND WHEREAS, in said trust agreement it is provided that the Creator may change, add to, or modify any of the terms thereof;
NOW, THEREFORE, the Creator changes, modifies, and alters said declaration of trust agreement, and all amendments thereto, so that said property, and the income thereof, shall be held, administered, handled, and distributed as herein provided.
* * *
7. After payment of all necessary expenses, all of the remaining income therefrom shall be paid as follows:
(a) To Richard H. Malone, as long as he lives.
(b) If the Creator survives Richard H. Malone, then, after the death of Richard H. Malone, to the Creator, as long as she lives * * *.
* * *
9. No part of the trust estate shall ever be subject to any judgment, decree, execution, garnishment, attachment, order of court, or other process for any debt or obligation of or demand against any of the respective beneficiaries thereof, or be appropriated or taken in any manner or form whatsoever therefor, nor shall any part thereof, while remaining in the hands of
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