Hartford Nat'l Bank & Trust Co. v. Comm'r of Internal Revenue (In re Estate of Thomson)

• Decision Date: 23 August 1972
• Docket Number: 3539-71.,Docket Nos. 7482-70
• Citation: 58 T.C. 880
• Parties: ESTATE OF JAMES L. THOMSON, DECEASED, HARTFORD NATIONAL BANK AND TRUST COMPANY AND A. LINDSAY THOMSON, CO-EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENTESTATE OF ADELAIDE L. THOMSON, DECEASED, THE CONNECTICUT BANK AND TRUSTCOMPANY AND A. LINDSAY THOMSON, CO-EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

58 T.C. 880

ESTATE OF JAMES L. THOMSON, DECEASED, HARTFORD NATIONAL BANK AND TRUST COMPANY AND A. LINDSAY THOMSON, CO-EXECUTORS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENTESTATE OF ADELAIDE L. THOMSON, DECEASED, THE CONNECTICUT BANK AND TRUSTCOMPANY AND A. LINDSAY THOMSON, CO-EXECUTORS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 7482-70

3539-71.

United States Tax Court

Filed August 23, 1972.

John M. Donahue and Elliott C. Miller, for the petitioners.

Robert B. Dugan, for the respondent.

Decedent established a trust prior to 1931, reserving to himself the discretionary power to distribute trust income to beneficiaries or to accumulate such income and add it to principal. Held: Each item of income thus added to principal constituted a separate ‘transfer,‘ United States v. O'Malley, 383 U.S. 627, and all such post-1931 additions are subject to inclusion in decedent's gross estate under sec. 2036(a)(2), 1954 Code. They are not relieved of tax by sec. 2036(b) relating to transfers ‘made before March 4, 1931,‘ which is applicable in this case only to that portion of the trust at decedent's death that is allocable to the property which he had transferred to the trust prior to that date. The amount allocable to the post-1931 additions is determined herein.

OPINION

RAUM, Judge:

The Commissioner determined a deficiency of $37,176.18 in the estate tax of the Estate of James L. Thomson and a deficiency of $80,156.68 in the estate tax of the Estate of Adelaide L. Thomson. The only issues remaining for decision are: (1) Whether trust income added to principal periodically from 1933 through 1966 was ‘transferred’ to the trust after March 4, 1931, the effective date of section 2036, I.R.C. 1954, where the decedent had created the trust prior to March 4, 1931, reserving to himself the discretionary power to distribute trust income to beneficiaries or to accumulate such income and add it to principal, and the post-1931 income additions were made pursuant to such power; and (2) if so, what portion of the value of the trust is allocable to the post-1931 transfers of income and therefore includable in the decedent's gross estate under section 2036(a)(2). The facts have been stipulated.

The petitioner in docket No. 7482-70 is the Estate of James L. Thomson, Hartford National Bank & Trust Co. and A. Lindsay Thomson, coexecutors. The petitioner in docket No. 3539-71 is the Estate of Adelaide L. Thomson, the Connecticut Bank & Trust Co. and A. Lindsay Thomson, coexecutors. James L. Thomson died testate on July 23, 1966, and Adelaide L. Thomson, his wife, died testate on March 14, 1968. Both decedents resided in West Hartford, Conn., at the time of death. Their respective Federal estate tax returns were filed with the district director of internal revenue at Hartford, Conn., and on both returns the gross estates were valued as of the date of death. At the time of the filing of both petitions herein, the principal places of business of both Hartford National Bank & Trust Co. and the Connecticut Bank & Trust Co. were in Hartford, Conn., and the residence of A. Lindsay Thomson was in West Hartford, Conn.

On June 4, 1928, James L. Thomson (‘Thomson’ or the ‘decedent’) created a trust for the benefit of his son, Alexander Lindsay Thomson, and his daughter, Jean Thomson. The trust was funded with securities then having an aggregate market value of approximately $31,237, and the City Bank & Trust Co. of Hartford, Conn., was named as trustee.

The trust instrument gave the trustee broad administrative powers over the principal of the trust. In respect of the disposition of trust income, the instrument provided, in relevant part, as follows:

The Trustee shall collect the rents, income and profits of said trust estate as the same accrue, shall pay out of said trust estate all lawful taxes and expenses chargeable against the same, and against the earnings thereof, including reasonable fees for its services as Trustee, and during the lifetime of the Donor shall add the net income remaining from time to time after the payment of such expenses to the principal of said trust, to be managed, invested, reinvested and treated in all respects as and for a part of said principal, unless the Donor shall from time to time instruct the trustee to make payments of or from said income to the beneficiaries, or either of them, during the donor's lifetime; power to direct such earlier payment of income to the beneficiaries being expressly reserved by the donor.

The trust instrument further provided that upon the decedent's death, the principal of the trust was to be divided into two equal parts, one part for the benefit of Alexander Lindsay Thomson and the other for the benefit of Jean Thomson. The ‘net income’ from each part was to be paid to each respective beneficiary until he or she attained the age of 30 years, at which time that beneficiary was to receive his or her respective share of the principal of the trust. If either beneficiary was already 30 years old when the decedent died, he or she was to receive half of the principal of the trust forthwith. Provision was made for other disposition in the event that either beneficiary died before receiving his or her share of the principal.

On March 14, 1933, following an adjudication of insolvency of the City Bank & Trust Co., the Probate Court for the District of Hartford, Conn., appointed the Travelers Bank & Trust Co. of Hartford, Conn., as successor trustee of the Thomson trust. An inventory of the trust assets filed with the Probate Court by the successor trustee stated the aggregate value of such assets on March 15, 1933, to be $19,804.65. The Travelers Bank & Trust Co. was later acquired by Hartford National Bank & Trust Co., which was trustee at the time of the decedent's death.

The decedent never exercised his power to direct the trustee to make distributions out of trust income to either or both of the beneficiaries during the decedent's lifetime. Accordingly, all of such income was added to principal pursuant to the terms of the trust instrument. Between March 14, 1933, and July 23, 1966, the date of Thomson's death, trust income in the amount of $97,260.56 was added to principal. Federal income taxes amounting to $17,260.40 were paid by the trust during this period, with the consequence that $80,000.16 of net income had accumulated in principal by the time Thomson died. The record does not disclose whether any trust income was earned and added to principal from June 4, 1928, when the trust was created, through March 13, 1933.

No additions to the trust aside from accumulations of income were made after June 4, 1928. The trust assets were valued at $222,235.77 as of the date of the decedent's death. Since both of the beneficiaries were over 30 years old when Thomson died, the trust assets were distributed to them outright in equal shares pursuant to the terms of the trust instrument and an order of the Probate Court of Hartford, Conn., dated November 3, 1966.

No value was included in the gross estate reported on decedent's estate tax return on account of the June 4, 1928, trust, although the existence of the trust was disclosed on a schedule attached to the return. In his notice of deficiency to decedent's executors, the Commissioner determined: ‘that the value of .814434 of a certain trust created by the decedent on June 4, 1928—in the amount of $180,525.45— is includable in the gross estate under the provisions of Section 2036(a)(2) of the Code.’ The resolution of the only remaining controversy with respect to the tax owed by the Estate of Adelaide L. Thomson depends solely on the outcome of the dispute regarding the estate of her husband.

1. Whether income added to principal after March 4, 1931, was ‘transferred’ after such date.— Section 2036(a)(2), I.R.C. 1954, requires inclusion of the value of property which has been the subject of an inter vivos transfer in trust in the settlor's gross estate where at the time of his death the settlor retains the right to designate the persons who may possess or enjoy the income from such property.¹ United States v. O'Malley, 383 U.S. 627, 631. A discretionary power to distribute trust income or to accumulate such income and add it to principal constitutes a power to determine whether the income beneficiaries or remaindermen shall possess or enjoy the income, and it is well settled that section 2036(a)(2) requires the inclusion of both the original principal and accumulated income of a trust in the gross estate of a settlor who holds such a power at the time he dies. United States v. O'Malley, supra at 633; Estate of Arthur J. O'Connor, 54 T.C. 969, 973. See also Round v. Commissioner, 332 F.2d 590, 595-596 (C.A. 1), affirming 40 T.C. 970; sec. 20.2036-1(b)(3), Estate Tax Regs. When Thomson died he was possessed of a power to decide which of the two named beneficiaries of the trust would receive the trust income, and he also retained a power to direct that trust income be accumulated and added to the principal of the trust, eventually to be distributed to the corpus beneficiaries instead of the income beneficiaries. The petitioners do not deny that such powers qualified as powers to ‘designate’ within the meaning of section 2036(a)(2).²

Section 2036(b),³ however, provides that ‘This section shall not apply to a transfer made before March 4, 1931.’ Accordingly, the Commissioner does not challenge the exclusion of a portion of the trust allocable to the securities which Thomson transferred on June 4, 1928, when the trust was created, but he does contend that a portion of the trust allocable to the trust income which was periodically added to principal from 1933 through 1966 must be included in the decedent's gross estate. The sole remaining issue is whether such income was ‘transferred’ before or after March 4, 1931. The Commissioner's position is that the decedent effected a transfer of income...