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

• Decision Date: 12 February 1976
• Docket Number: 8799-74.,Docket Nos. 181-74
• Citation: 65 T.C. 968
• Parties: ESTATE OF JANE DEP. WEBSTER, DECEASED, HENRY U. HARRIS, CHARLES F. HOVEY AND JAMES H. ORR, CO-EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

65 T.C. 968

ESTATE OF JANE DEP. WEBSTER, DECEASED, HENRY U. HARRIS, CHARLES F. HOVEY AND JAMES H. ORR, CO-EXECUTORS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 181-74

8799-74.

United States Tax Court

Filed February 12, 1976.

Decedent's husband gave her 4,000 shares of stock in January of 1922. Decedent transferred these shares to a trust, created for her four children, in December of 1923. The trust indenture stated that decedent could terminate the trust with the consent of two of her children. At decedent's death, only one of her children was living. Decedent borrowed money to purchase United States Treasury bonds 3 1/2's of 11/15/98, which later were used to pay part of her estate tax. Held, petitioner has failed to carry its burden of proving that decedent's husband, not decedent, was the actual transferor of the original corpus of the trust. Held, further, decedent did not have, at her death, a power to terminate the trust, despite respondent's contentions that decedent probably never considered that she might survive three of her four children, that it was her intention to possess a power of termination until her death, and that courts of the local jurisdiction would have sanctioned termination with the consent of decedent and her last living child. Held, further, decedent's power to terminate expired with the death of her third child, causing a gift at that time. Held, further, postdeath interest on the gift tax liability is deductible as an administration expense. Held, further, postdeath interest on the loans decedent made to purchase United States Treasury bonds is deductible as an administration expense. Carl J. Marold and Robert McDonough, for the petitioners.

WILES, Judge:

Respondent determined a deficiency in decedent's estate tax of $7,379,278.53. Respondent also determined a gift tax deficiency of $4,641,913.22 for 1968. There are four issues before this Court:

(1) Whether decedent was transferor of the original corpus of a trust created in 1923; (2) If decedent was, in fact, transferor of the corpus: (a) Whether, at her death, she had the power to terminate the trust within the meaning of section 2038(a)(2),¹ or (b) whether such power to terminate expired before decedent's death because of the death of one of her children in October of 1968, and, if so, whether such expiration resulted in a taxable gift under sections 2501 and 2511;

(3) If a taxable gift resulted in 1968, from the expiration of the power to terminate, whether interest on the gift tax accruing after decedent's death is deductible under section 2053 as an administration expense; and

(4) Whether interest the executors paid on loans decedent made is deductible under section 2053(a) as an administration expense, to the extent that the interest accrued after decedent's death.

FINDINGS OF FACT

Some facts were stipulated and are found accordingly. Decedent Jane deP. Webster, a resident of Newton, Mass., died on August 20, 1969, at the age of 99. Petitioner is the Estate of Jane deP. Webster, Henry U. Harris, Charles F. Hovey, and James H. Orr, coexecutors. When the petitions herein were filed, the coexecutors' business address was 100 Federal Street, Boston, Mass.

On or about November 20, 1970, the executors filed the Federal estate tax for decedent's estate with the District Director of Internal Revenue, Boston, Mass. They paid estate taxes of $6,199,207.70 reflected thereon, $868,632.01 in cash and the balance, $5,330,575.69, through application of $5,328,000 face amount of United States Treasury Bonds 3 1/2's of 11/15/98.

Decedent was born on June 14, 1870. She married Edwin S. Webster, who died on May 10, 1950. Decedent and Edwin S. Webster's four children were Frances Webster, Mabel Webster Harte, Edwin S. Webster, Jr., and Mary M. Webster; three of them predeceased decedent. The last of the three to die was Mabel Webster Harte, who died on October 8, 1968.

On January 19, 1922, decedent's husband gave decedent 4,000 shares of Stone & Webster, Inc., stock. On the same day, Edwin S. Webster transferred an additional 1,000 shares of Stone & Webster, Inc., to each of four trusts created that day for the benefit of his children.

On December 15, 1923, Richard Harte, Edwin S. Webster, Jr., and Chandler Hovey created a trust (hereinafter the 1923 trust) under a trust indenture, which they executed as trustees. On or about that same day, decedent, then 53 years of age, transferred to the 1923 trust the 4,000 shares of Stone & Webster, Inc. which her husband had given her on January 19, 1922.

The trust indenture provided in part as follows:

(2) The Trustees may, in their discretion, accumulate and add to the principal of the Trust Fund all or any part of the net income of the trust in any year; and to that end the Trustees shall have power at any time to apply for and take out insurance on the life of said Edwin S. Webster, husband of said Jane deP. Webster and father of the beneficiaries hereinafter named, or to acquire from said Jane deP. Webster policies of insurance heretofore applied for and taken out by her on the life of her husband; and the Trustees shall have power to apply all or any part of the net income of the trust to the payment of premiums on policies of insurance so acquired or taken out by them, to borrow money on any such policies or on the security of other property of the trust, to discontinue payments on any such policies or exercise any of the options contained therein, and generally to deal in and with any such policies and other property as fully as if they were the individual and beneficial owners thereof.

(3) The Trustees may in their discretion distribute and pay over in each year so much of the net income as they may in their sole discretion determine in equal shares to and among the four children of said Edwin S. Webster and Jane deP. Webster, namely Frances Webster, Mabel Webster Harte, Edwin S. Webster, Jr., and Mary M. Webster, during their respective lives and in case of the decease of any of said children leaving issue then the share which would have been paid to such child if alive shall be distributed to and among the issue of such child by right of representation; and the balance of the net income not so distributed in any year shall be accumulated and added to the principal of the Trust Fund pursuant to Article 2 hereof.

(4) In the event of the death of said Edwin S. Webster during the existence of this trust, the Trustees may in their discretion purchase from the executors or administrators of his estate any securities owned by said estate at such prices as they may in their absolute discretion deem reasonable, using for that purpose any available funds of the trust, and may exercise this power without regard to the fact that any or all of such securities may not be of a character which would under ordinary circumstances be deemed appropriate for the investment of trust funds, or that the amount of any particular class of securities so purchased from said estate might under ordinary circumstances be deemed excessive in comparison to the aggregate amount of the trust estate, it being understood that said Jane deP. Webster in creating this trust desires that in the event of the death of said Edwin S. Webster his executors or administrators may be enabled without undue sacrifice of any of the assets of his estate to realize thereupon cash which they may require for the settlement of the estate.

(5) This Trust shall terminate in any event upon the death of the last survivor of the following persons, namely, Frances Webster, Mabel Webster Harte, Edwin S. Webster, Jr., and Mary M. Webster it (sic) may be terminated at any time during the life of said Jane deP. Webster by a written instrument executed by said Jane deP. Webster and by any two of her said children; and thereafter it may be terminated by a written instrument executed by at least a majority of her said children or if any of them have died then by a majority of the survivors of them. Upon the termination with all accumulations, free of all trusts, in equal shares to and among the said four children, namely, Frances Webster, Mabel Webster Harte, Edwin S. Webster, Jr., and Mary M. Webster, or the survivors of them and the issue by right of representation of any of said four children who shall previously have died leaving issue.

Respondent mailed a notice of deficiency, dated October 29, 1973, asserting a deficiency in Federal estate taxes of $7,379,278.53. Docket No. 181-74 involves petitioner's appeal from that determination. Respondent based most of the estate tax deficiency upon his assertion that the assets of the 1923 trust were includable in decedent's gross estate because a power of termination, reserved in the trust indenture, was held by decedent at the time of her death.

Decedent borrowed the money to purchase United States Treasury bonds 3 1/2's of 11/15/98. The unpaid balance on decedent's loans was over $3.5 million at her death. When the executors were appointed, decedent's debts and interest thereon became their obligation. The executors made interest payments of $43,649.38 for interest accruing subsequent to decedent's death on the loans outstanding on the date of decedent's death. The executors deducted this interest on the Federal estate tax return under section 2053(a) and did not deduct it on any income tax return that they filed. Respondent disallowed the deduction in his notice of deficiency.

On or about November 19, 1973, the executors filed with the District Director of Internal Revenue, Boston, Mass., a Federal gift tax return for decedent for 1968. In that return, the executors reported the facts pertaining to the expiration on October 8, 1968, of a power that decedent held to terminate the 1923 trust and the value of the property in that trust on that date. The executors expressly denied liability for any gift tax because of the expiration of a power to terminate held...