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

• Decision Date: 22 September 1948
• Docket Number: Docket No. 9707.
• Citation: 11 T.C. 314
• Parties: ESTATE OF ERNEST HINDS, DECEASED (MINNIE H. M. HINDS, EXECUTRIX), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

11 T.C. 314

ESTATE OF ERNEST HINDS, DECEASED (MINNIE H. M. HINDS, EXECUTRIX), PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 9707.

Tax Court of the United States.

Promulgated September 22, 1948.

1. On December 31, 1940, decedent and his wife, who were domiciled in Texas, transferred certain community property which they owned to a trust, with a New York corporation as trustee, directing that the trust was to be administered under New York law and that the income from the property be paid in quarterly installments to the wife. Held, the transfer was not made in contemplation of death; held, further, the laws of Texas determined the ownership of the income of the trust and, under Texas law, one-half of the income of the trust belonged to the husband, notwithstanding it was payable to the wife, and one-half of the value of the property which decedent transferred is includible in his gross estate under that provision of section 811(c) which reads in part: ‘* * * under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death (1) the possession or enjoyment of, or the right to the income from, the property * * * .‘

2. Decedent and his wife owned at the time of his death, as community property, a homestead in San Antonio, Texas. Held, one-half the value of this property is includible in decedent's gross estate, undiminished by the right of the wife to occupy such property as her homestead for life. See Regulations 105, sec. 81.13. Leroy G. Denman, Esq., and Leroy G. Denman, Jr., Esq., for the petitioner.

Donald P. Chehock, Esq., and L. R. Van Burgh, Esq., for the respondent.

The Commissioner has determined a deficiency in the estate tax of the estate of Ernest Hinds, deceased, in the amount of $2,454.73. The deficiency results from several adjustments made by the Commissioner to the estate tax return filed by the executrix of the estate. Only two of these adjustments are contested, namely, the increase by the Commissioner of the value of the homestead occupied by decedent and his wife at the time of his death and the addition to decedent's gross estate of $71,096.93 as his community one-half interest in certain securities conveyed to an irrevocable trust December 31, 1940. This last adjustment was explained in the deficiency notice as follows:

It is held that the above assets constituted the corpus as of the valuation date of a trust created by decedent and wife as of December 31, 1940, and that the values determined above represented the fair market values of decedent's community one-half interest as of the valuation date. It is further held that the transfer in trust made by the decedent on December 31, 1940, was made in contemplation of death and further was a transfer under which the decedent retained the possession or enjoyment of, or the right to the income from the property so transferred. The value as of the optional valuation date of June 17, 1942, of the decedentS interest in the transferred property has therefore been included in the gross estate pursuant to Section 811(c) of the Internal Revenue Code.

FINDINGS OF FACT.

Petitioner is the estate of Ernest Hinds, deceased who was a resident of Bexar County, Texas, and died on June 17, 1941, and Minnie H. M. Hinds, his wife, is the executrix appointed by the will of decedent, which has been probated in the Probate Court of Bexar County, Texas, where she has duly qualified as executrix. The estate tax return was filed with the collector for the first district of Texas, September 15, 1942.

The decedent, Ernest Hinds, at the time of his death at the age of 76 years was a retired Major General in the United States Army. In his youth he received his first military training at the United States Military Academy at West Point, and immediately after graduation and receipt of his commission in the United States Army he chose the Artillery as his special branch and continued his training in that branch of the service. Immediately upon the outbreak of the Spanish-American War he left the Army training school in which he was then studying and arrived in Cuba and entered the front line combat at once. From then on until the end of his Army career, he continuously served in active combat front line duty in all of the wars and military expeditions in which the United States engaged from time to time, including service as Chief of Artillery in the American Expeditionary Forces in Europe in the First World War, to which he was transferred from the Philippine Islands immediately upon the outbreak of the war. After the end of that war he served in various capacities and was Chief of the Eighth Corps Area at the time of his retirement in 1928. That occurred about six months before the retirement age when he was requested by brother officers to assume the active management of the United States Services Automobile Association, which is a mutual insurance association for the exclusive insurance of members of the Army, Navy, Marine, Coast Guard, and Geodetic Survey. He continued in the management of that business until the time of his death.

For the first year and a half decedent received an annual salary of $1000 from the auto association, and thereafter until his death an annual salary of $12,000. In addition to this salary, decedent also received retirement pay of $6,000 a year as a retired Major General. Both the salary and retirement pay terminated upon the death of decedent. The widow thereafter had as her only source of income dividends and interest from stocks and bonds, most of which were placed in trust, and a widow's pension of $50 (now $60) a month as the widow of a Spanish-American War veteran. The funds and securities which General Hinds owned at the time of his death and those which he had placed in trust, as hereinafter mentioned, were accumulated by him in the period of time following his retirement from the Army.

When he was 24 years of age he married Minnie H. M. Hinds, who was then 18 years of age. There were two children born to them: A son, John H. Hinds who also chose a military career, and a daughter, Marjorie Cruse, wife of Colonel Fred T. Cruse, United States Army, retired.

In 1932 General Hinds went to New York for the purpose of creating an irrevocable trust, principally for the benefit of his wife. She accompanied him and, after some negotiations with the Lawyers Trust Co., with whom he was placing the trust, he informed her of his intention to make it an irrevocable gift. She objected to this and insisted that if he made the trust he should not make it irrevocable. Yielding to her objections, he provided in the trust which he then created with the Lawyers Trust Co. of New York as trustee that it could be revoked by him at any time. Thereafter, from time to time during the following years, he sought to obtain her consent to waive the right to revoke the trust so as to make the gift complete, but she steadily refused to permit it or accept it. Finally, in the summer of 1940 she fell and broke her collarbone, which was followed by a sort of nervous collapse, so that General Hinds was worried about her condition. He took her on a trip to Atlantic City in September of that year, and again proposed the matter of making the trust irrevocable. He persuaded her to consent to the making of the trust irrevocable by assuring her that it was not for her benefit alone, but also for the benefit of the children. He went immediately with her to New York City and gave directions to the Lawyers Trust Co., still acting as trustee under the original trust, for making the trust irrevocable. The trust of 1932 was revoked by General Hinds. The same securities that were in the original trust were placed in the irrevocable trust, except that some insurance on his life and 100 shares of Union Pacific Railroad Co. stock were withdrawn. He instructed the Lawyers Trust Co. to prepare the trust indenture for execution on December 31, 1940, although all the details were being settled in October of 1940, and stated that his reason was to simplify his bookkeeping, which was kept on a calendar year basis, so that the transfer would be made as of the end of the calendar year.

All securities transferred to the new trust were community property, with the decedent's community one-half having a total value of $71,086.93 (as of June 17, 1942). No property was acquired by the decedent and his wife between the date of the execution of the trust on December 31, 1940, and the date of death on June 17, 1941. The only property retained by the decedent, not conveyed to the trust, was his community interest in the home, furniture, automobiles, cash, note, and stocks, with a total aggregate value considerably less than his community interest in the property which was conveyed to the trust. The $71,086.93 of stocks and bonds representing his community one-half interest transferred by the decedent on December 31, 1940, constituted about two-thirds of the decedent's gross estate. On or about December 31, 1940, the decedent changed the beneficiary of his four life insurance policies excluded from the new trust from being made payable to the trust by making them payable to his wife. The Federal estate tax return which was filed after decedent's death was filed on the basis of the $20,335.88 insurance payable to the wife being exempt insurance, the transfer of December 31, 1940, being excludible, and the balance of the estate reported at $25,260.21 being less than the estate exemption.

The trust agreement executed by the decedent and his wife on December 31, 1940, stated that all the securities transferred were the community property of the settlors. After itemizing the bonds and stocks transferred, it provided for the trustee to pay the net income therefrom as follows:

* * * to pay the net income from the 1st day of January, 1941, together with any...