Estate of Staley v. Commissioner of Internal Revenue, Docket No. 103754.

• Decision Date: 02 July 1942
• Docket Number: Docket No. 103754.
• Citation: 47 BTA 260
• Parties: ESTATE OF A. E. STALEY, SR., A. E. STALEY, JR., EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

47 B.T.A. 260 (1942)

ESTATE OF A. E. STALEY, SR., A. E. STALEY, JR., EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 103754.

Board of Tax Appeals.

Promulgated July 2, 1942.

Charles C. LeForgee, Esq., for the petitioner.

Franklin F. Korell, Esq., and David Altman, Esq., for the respondent.

The Commissioner determined a deficiency in the income tax of decedent for the year 1935 in the sum of $79,300.99. The sole issue before the Board is whether or not the sum of $150,000 of the income of trusts established by decedent for his children is includible in decedent's income for the taxable year.

Many of the facts were stipulated. We set forth only those of the stipulated facts material to disposition of the issue before us.

FINDINGS OF FACT.

Petitioner is the executor of the estate of A. E. Staley, Sr., hereinafter referred to as decedent. Decedent's income tax return for the taxable year was filed with the collector of internal revenue for the district of Florida.

Prior to March 1932 decedent was president of the A. E. Staley Manufacturing Co., hereinafter referred to as the corporation, and after that date he became and remained chairman of the board of directors of the corporation until his death. In the year 1934 decedent was the father of five children, Ione Tressler Dunlap, Augustus E. Staley, Jr., Ruth Richardson Hunt, Mary Louise Annan, and Andrew Rollin Staley, all of whom were living and over 27 years of age. Decedent at that time was the owner of approximately 36,000 of the outstanding 42,000 shares of the common stock of the corporation and of a substantial number of shares of the preferred stock of the corporation.

Decedent determined to make a gift of 6,000 shares of common stock and 2,000 shares of preferred stock of the corporation in trust for the benefit of each of his children. It was ascertained that the transfer of the proposed gifts in trust would entail a gift tax aggregating approximately $150,000 more than the amount of cash which decedent had available for payment of such tax. Decedent thereupon decided to transfer the stock in trust in such a way as to enable him to raise the $150,000 necessary for payment of the gift tax.

Under date of October 18, 1934, decedent executed five trust instruments, each naming the Safe Deposit & Trust Co. of Baltimore, trustee, A. E. Staley, Jr., cotrustee, and one of decedent's children life beneficiary. Upon execution of the trust instruments decedent delivered to the trustee, as the corpus of each trust, certificates representing 6,000 shares of common stock and 2,000 shares of preferred stock of the corporation. At the date of these transfers the common stock had a value of $42.50 a share and the preferred stock had a value of $85 per share.

The five trust instruments were identical except as to the named beneficiary. Each of the trust instruments contained, among others, the following provisions:

THIS TRUST AGREEMENT made this 18th day of October, 1934, by and between AUGUSTUS E. STALEY, hereinafter called Donor, Party of the First Part, and the SAFE DEPOSIT AND TRUST COMPANY OF BALTIMORE, (a Maryland corporation), hereinafter called Trustee, and AUGUSTUS E. STALEY, JR., of Decatur, Illinois, hereinafter called Co-Trustee, the Parties of the Second Part.

WITNESSETH:

THAT, WHEREAS, the Donor has assigned, transferred and delivered to the Trustee the property described in the schedule hereto attached and made a part hereof and entitled, "SCHEDULE OF THE PROPERTY OF THE AUGUSTUS E. STALEY TRUST," (hereinafter called Trust Estate), in Trust, however, for the uses and purposes in this instrument set forth and stated.

NOW, THEREFORE, for and in consideration of the sum of Thirty Thousand Dollars ($30,000.00) to be paid to the Donor, as provided in ARTICLE THIRD, and certain other good and valuable considerations paid by the parties hereto each to the other, receipt of which is by them now severally acknowledged, and in further consideration of the covenants in this instrument to be by said parties respectively kept and performed, it is hereby agreed:

* * * * * * *

ARTICLE THIRD: Out of the income derived and received by my said Trustee from the Trust Estate, the Trustee shall:

(a) Upon the written approval of the Co-Trustee, pay all taxes, costs and expenses necessary for the preservation and maintenance of said Trust Estate.

(b) Out of the income of said Trust Estate to annually pay to the Trustee two percent (2%) for the services by it rendered as such Trustee, and annually pay two percent (2%) of the income of said Trust Estate to the Co-Trustee so long as said Co-Trustee shall so act as Co-Trustee.

* * * * * * *

(c) After the Trustee has made the payments in (a) and (b) of this ARTICLE THIRD hereof mentioned, the Trustee shall out of the income by it received up to and including March 15, 1935, pay to the Donor the entire income by it received out of said Trust Estate, in satisfaction of the consideration of Thirty Thousand Dollars ($30,000.00) as hereinbefore provided, but in no event shall such payment to the Donor exceed the sum of Thirty Thousand Dollars ($30,000.00).

After March 15, 1935, the said Trustee shall distribute the income from said Trust Estate in the following manner:

(1) After the payment of (a) and (b) aforesaid, it shall pay to * * * the named beneficiary out of the income of said Trust Estate the sum of Five Thousand Dollars ($5,000.00) per annum, accounting from March 15, 1935, all payments of said Five Thousand Dollars ($5,000.00) shall be paid in such installments as the Trustee shall deem practicable, and all sums annually received as income by said Trustee in excess of said annual payments of Five Thousand Dollars ($5,000.00) per annum, shall be by said Trustee annually paid to the Donor until the total sum of said Thirty Thousand Dollars ($30,000.00) has been paid to the said Donor.

Each of the trust instruments further provided for the accumulation of a fund of $25,000, after the $30,000 had been paid to decedent and $5,000 had been paid to the beneficiary or beneficiaries. Thereafter the trustee was to retain 20 percent of the income of each trust until an additional $25,000 had been accumulated in each trust, after which the trustee should pay the balance of the net income to the beneficiaries. In the event that the net income of any trust should fall below $5,000 during any year, the trustee was directed to invade the $50,000 accumulated fund to the extent of the deficiency.

Each of the trusts is irrevocable and is to terminate upon the expiration of 20 years after the death of the named beneficiary or upon the expiration of 40 years after the date of execution of the trust instrument. But if the expiration of the 40-year period occurs after the death of the named beneficiary, then the trust is to terminate upon the date of the periods mentioned nearest in time after the death of the named beneficiary. Each trust is to terminate, in any event, within 20 years of the death of the named beneficiary.

Each trust instrument provided that upon termination the trustee should pay the entire trust estate with all accumulations therein to the child of the named beneficiary surviving at the date of distribution, or to the...