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

• Court: U.S. Tax Court
• Writing for the Court: RUWE
• Citation: Graves v. Comm'r of Internal Revenue (In re Estate of Graves), 92 T.C. 1294, 92 T.C. No. 86 (T.C. 1989)
• Decision Date: 19 June 1989
• Docket Number: Docket No. 39100-87
• Parties: ESTATE OF ANNABEL DYE GRAVES, DECEASED, ROBERT S. GRAVES, JR. AND RICHARD R. GRAVES, CO-EXECUTORS, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent

92 T.C. 1294

92 T.C. No. 86

ESTATE OF ANNABEL DYE GRAVES, DECEASED, ROBERT S. GRAVES, JR. AND RICHARD R. GRAVES, CO-EXECUTORS, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 39100-87

United States Tax Court

Filed June 19, 1989

D created a trust in 1927. She retained a right to trust income, various rights with respect to the trustee, and a right to distribute income and designate beneficiaries. She expressly relinquished the right to revoke the trust in favor of herself or her husband. In 1945, D released her right to distribute income and designate beneficiaries but retained the right to receive trust income. HELD: A transfer to the trust, within the meaning of sec. 2036(c), ¹ I.R.C., occurred in 1927. Since the transfer occurred prior to March 4, 1931, the trust corpus is not includable in D's gross estate under sec. 2036(c). HELD FURTHER: After 1945, D retained no power to alter, amend, or revoke the trust, and the trust corpus is not includable in her estate under sec. 2038. D. French Slaughter, III, for the petitioner.

Richard F. Stein, for the respondent.

OPINION

RUWE, JUDGE:

This case is before the Court on petitioner's motion for summary judgment and respondent's cross motion for summary judgment, filed pursuant to Rule 121. In his notice of deficiency, respondent determined a deficiency of $179,036.50 in the Federal estate tax of the Estate of Annabel Dye Graves (decedent). After concessions by petitioner, the issues for decision are whether a 1927 trust is includable in the gross estate of the decedent pursuant to sections 2036 or 2038.

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Shiosaki v. Commissioner, 61 T.C. 861, 862 (1974). Summary judgment is not a substitute for a trial in that disputes over factual issues are not to be resolved in such proceedings. Naftel v. Commissioner, 85 T.C. 527, 529 (1985); Espinoza v. Commissioner, 78 T.C. 412, 416 (1982). Rule 121 provides that either party may move for a summary judgment upon all or any part of the legal issues in controversy so long as there is no genuine issue of material fact. Rule 121(b) provides that a decision shall be rendered if the pleadings, answers to interrogatories, depositions, admissions, and any other acceptable materials, show that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. The facts in this case are not in dispute.

The decedent was a resident of Syria, Virginia when she died on December 31, 1983. Her executors were residents of Virginia on the date the petition was filed. On May 11, 1927, the decedent established a trust with a corpus of $100,000 by a trust agreement with the Central National Bank of Cleveland as trustee. The initial trust was funded with various assets, including stocks and bonds. These assets were sold, and the proceeds of the sales were used to purchase other assets. On June 30, 1984, (the alternative valuation date), the fair market value of the trust assets was $394,547.09.

Under the terms of the trust agreement, the decedent reserved the following powers. First, she reserved certain powers with respect to the trustee. She reserved the right to require the trustee to pay all or any portion of the trust income to her. She reserved the power to nominate a successor trust company trustee. This power was also reserved for her husband, Robert S. Graves, should he survive her. Mr. Graves predeceased the decedent. The decedent also reserved the power to direct the manner in which the trustee invested, reinvested and handled the trust property, and the power to require the trustee to obtain written approval prior to selling, distributing, or reinvesting trust property. The trust agreement provided that ‘Should ROBERT S. GRAVES pre-decease the Grantor, then the Trustee, by and with the consent of the Grantor, shall invest and re-invest the principal Trust Estate, but in case of any disagreement the decision of the Trustee shall be conclusive.‘ The decedent also reserved the power to approve the trustee's determination as to whether money or property coming into the trust would be treated as principal or income.

Secondly, the decedent reserved the right to distribute income and designate beneficiaries (other than herself and her husband). The trust agreement provided that the grantor reserved the right to ‘amend, alter or change the terms and conditions of this agreement only in respect to the distribution of income and the designation of beneficiaries (other than the Grantor and ROBERT S. GRAVES) hereunder * * * .‘ This power was released by a Release of Power of Appointment filed with the trustee on June 1, 1945.

The trust agreement expressly stated that neither the decedent nor her husband had the power to revoke the trust. The trust agreement stated:

It is especially agreed that the right to revoke said agreement, either in part or in whole, is not reserved to either the Grantor or ROBERT S. GRAVES * * *.

After the death of the decedent's husband, the net income of the trust was paid out to the decedent pursuant to her direction (except for $4,176.89 of income accrued in 1983, the year of her death). On March 6, 1979, in violation of the trust agreement, 310 shares of common stock were distributed from the principal of the trust to the decedent.

SECTION 2036(c)

Section 2036(a) provides for the inclusion in the decedent's gross estate of the value of property which the decedent transferred while retaining the income for life. Section 2036(c) ² provides that section 2036(a) does not apply to a transfer to a trust made before March 4, 1931. We have consistently held that a ‘transfer‘ for purposes of section 2036(c) occurs when a grantor places legal title to the trust corpus beyond his recall. See Estate of Canfield v. Commissioner, 34 T.C. 978 (1960), affd. 306 F.2d 1 (2d Cir. 1962); Estate of Ridgway v. Commissioner, 33 T.C. 1000 (1960), affd. 291 F.2d 257 (3d Cir. 1961); Estate of Cuddihy v. Commissioner, 32 T.C. 1171, 1176 (1959). See also Pope v. United States, 296 F. Supp. 17, 23 (S.D. Cal. 1968).

In the 1927 trust agreement, the decedent expressly relinquished her and her husband's power to revoke the trust in their favor. In so doing, she irrevocably transferred legal title to the trust, and made a section 2036(c) ‘transfer.‘ The fact that the decedent reserved the power to designate beneficiaries does not require inclusion of the trust corpus in her gross estate. Commissioner v. Estate of Ridgway, 291 F.2d at 259.

Respondent argues that since appellate venue lies to the Fourth Circuit Court of Appeals, our rule in Golsen v. Commissioner, 54 T.C. 742 (1970), affd. 445 F.2d 985 (10th Cir. 1971), requires that we follow the Fourth Circuit's decision in Commissioner v. Estate of Talbott, 403 F.2d 851 (4th Cir. 1968), revg. 48 T.C. 271 (1967). In Golsen, we held that ‘better judicial administration requires us to follow a Court of Appeals decision which is SQUARELY IN POINT where appeal * * * lies to that Court of Appeals and to that court alone.‘ Golsen v. Commissioner, 54 T.C. at 757. (Emphasis added. Fn. refs. omitted.)

In Estate of Talbott, the decedent executed a pre-1931 trust agreement which provided that income was payable to the decedent and her spouse for their joint lives. The terms of the trust agreement provided that the decedent could, during her husband's lifetime and with his consent, modify, alter, or REVOKE the trust in whole or in part. It further provided that the surviving life income beneficiary could modify, alter, or revoke with the consent of one remainderman. Commissioner v. Estate of Talbott, 403 F.2d at 854.

At issue in Estate of Talbott was whether section 2036(c) ³ was intended to exclude revocable, as well as irrevocable trusts established before March 4, 1931, from the settlor's gross estate. We held that the revocable transfer of legal title to the property was a ‘transfer‘ for purposes of section 2036(c) and that ‘the statutory provision does not refer to an absolute or completed transfer of the entire beneficial interest in the conveyed property.‘ Estate of Talbott v. Commissioner, 48 T.C. at 276. The Court of Appeals for the Fourth Circuit reversed, holding that Congress intended in section 2036(c) to exclude only irrevocable pre-March 4, 1931 trusts from the operation of section 2036(a). Commissioner v. Estate of Talbott, 403 F.2d at 858. Because the trust agreement was expressly revocable in favor of the grantor after March 3, 1931, the court found the trust was includable in the decedent's gross estate. However, the court specifically limited its holding to cases in which the grantor of a pre-1931 trust had an express power to revoke the trust, as in Smith v. United States, 134 Ct. Cl. 136, 139 F. Supp. 305 (1956).

the Tax Court * * * has consistently expressed disagreement with the holding in Smith, although in each case, prior to the instant one, the Tax Court distinguished Smith on the ground that Smith, like the case at bar, concerned a trust revocable in favor of the settlor until after March 4, 1931, while the cases before the Tax Court concerned cases in which the transfer in trust was IRREVOCABLE prior to March 4, 1931, in the sense that the settlor could revoke the trust only for the benefit of others but not for himself. [Commissioner v. Estate of Talbott, 403 F.2d at 855. Emphasis added.]

The Court of Appeals concluded: ‘We express no view as to whether this distinction is valid.‘ 403 F.2d at 855 n.5.

The facts in the instant case are distinguishable from those in Estate of Talbott. In this case, the grantor had no express power to revoke the trust in her favor as did the grantor in Estate of Talbott. In fact, the trust agreement expressly relinquished the decedent's right to revoke the trust in her favor. Estate of Talbott cannot be considered ‘squarely on point‘ and it does not control the disposition of ...