Holmes v. Comm'r of Internal Revenue (In re Estate of Holmes), Docket No. 2943.
| Decision Date | 05 April 1944 |
| Docket Number | Docket No. 2943. |
| Citation | 3 T.C. 571 |
| Parties | ESTATE OF HARRY HOLMES, DECEASED, LUCY B. HOLMES, INDEPENDENT EXECUTRIX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Decedent in 1935 executed a trust indenture by which he irrevocably conveyed to himself as trustee certain corporate stocks to be held in trust for his three sons. The period of the trust was to be 15 years and under certain conditions was to continue for a longer term. At the termination of the trust the trust estate then remaining in the hands of the trustee was to be distributed to the respective beneficiaries. The grantor retained for himself while acting as trustee the right to terminate the portion of the trust given to any son, or all of them, and to distribute the principal thereof to the person or persons entitled to receive the same under the terms of the trust. The decedent retained no power to revest in himself or his estate the trust corpus or to change in any manner the portions of the trust estate which the beneficiaries were to receive. The decedent dies in 1940 without having exercised his power to terminate the trust. Held, that the value of the trust's corpus at decedent's death to the extent of the decedent's community property interest therein is not includible in his estate under the provisions of section 811(d), Internal Revenue Code. J. E. Price, Esq., for the petitioner.
Frank B. Schlosser, Esq., for the respondent.
The Commissioner has determined a deficiency in estate tax against the estate of Harry Holmes, deceased of $13,491.38. The deficiency is due to six adjustments made by the Commissioner to the estate tax return filed for the estate by the executrix. Only one of these adjustments is contested. It is the one by which the Commissioner added to the value of the property reported by the executrix in the estate tax return an item of $91,593.17 designated as ‘transfers.‘ This item is explained in the deficiency notice as follows:
Pursuant to the provisions of Section 811(d) of the Internal Revenue Code, it is held that the transfers made by the decedent to a trust executed under date of January 20, 1935, for the benefit of his three sons and certain other contingent beneficiaries, are properly includible in the gross estate of the decedent, that is to the extent of the decedent's community property interest therein. * * *
Petitioner by appropriate assignments of error contests the correctness of the foregoing adjustment made by the Commissioner.
The facts have been stipulated and they are adopted as our findings of fact. The following summary of these facts will suffice for the purposes of this opinion.
Petitioner is the duly qualified and acting independent executrix of the estate of Harry Holmes, her husband. A timely estate tax return was filed with the collector of internal revenue for the first district of Texas at Austin, Texas.
Harry Holmes of Houston, Texas, on January 20, 1935, executed an instrument, signed ‘Harry Holmes, Grantor and Trustee,‘ which was duly acknowledge by him and recorded in the deed records of Harris County, Texas. In this instrument he created a trust in favor of his three sons, respectively, Harry Holmes, Jr., John B. Holmes, and Thomas J. Holmes, and he conveyed to himself, Harry Holmes, trustee, and successor trustee provided for, for each of the sons, ten shares of stock in the Quintana Petroleum Co., a Texas corporation. This corporation was thereafter liquidated and the pro rate part of the corporation's assets was conveyed to Harry Holmes, trustee, under and by virtue of the above mentioned trust instrument. Harry Holmes died on October 5, 1940, five years and either and one-half months after he had executed this instrument and without terminating the trust.
The trust indenture contained, among others, the following provisions:
FIRST
That I, Harry Holmes, for and in consideration of One ($1.00) Dollar lawful money of the United States of America, and other good, valuable and sufficient consideration to me moving, receipt whereof is hereby acknowledge, do hereby irrevocably give, grant, convey, assign, transfer, set over and deliver said stock unto Harry Holmes, Trustee, during my lifetime,— unless sooner terminated, as hereinafter provided,— and upon my death, unto my sons, Harry Holmes, Jr., John B. Holmes and Thomas J. Holmes, as Joint-Trustees, or such of them as shall have reached the age of twenty-one (21) years, or shall have had their disabilities of minority removed, or the survivor or survivors of them, or to such other Trustee as may be appointed, as hereinafter provided; * * * for the use and benefit of my sons, Harry Holmes, Jr., John B. Holmes and Thomas J. Holmes, in equal shares, and such other beneficiaries and for such other purposes as hereinafter provided, * * *
The term ‘Trustee‘, as herein used, shall be construed as referring to myself while I act as Trustee hereunder, and thereafter to each and all of the Joint-Trustees named or provided for, as, if and when they act as such.
The Trustee shall, upon the execution hereof, divide or allocate the Trust Estate into three equal shares or separate trusts, one share or trust for my son, Harry Holmes, Jr., his surviving issue, if any, and such other beneficiaries and for such other purposes, as hereinafter provided; one share or trust for my son, John B. Holmes, his surviving issue, if any, and such other beneficiaries and for such other purposes, as hereinafter provided; and one share or trust for my son, Thomas J. Holmes, his surviving issue, if any, and such other beneficiaries and for such other purposes as hereinafter provided.
In the fourth, fifth, and sixth paragraphs of the trust indenture, each paragraph relating to a separate son, it was provided that during the lifetime of the named son and prior to the termination of the trust, the trustee should distribute the net income from the share so allocated to the respective son in convenient installments, preferably monthly. It was also provided that the trustee might withhold distribution of any portion of said net income should he determine it for the best interest of his son. Any portion of this net income so withheld was to be accumulated for the benefit of the named son and added to his part of the trust corpus and turned over to him at the termination of the trust.
It was also provided in the fourth, fifth, and sixth paragraphs of the trust instrument that should all of the settlor's son die without leaving surviving issue prior to receipt and distribution of all of the residue ;f the trust estate, then such residue should be distributed to the settlor's wife, Lucy B. Holmes, if living, and if she be not living, said residue should be distributed to the persons who would be her legal heirs under the laws of descent and distribution of the State of Texas.
The trust instrument further provided:
SEVENTH
The Trustee is hereby vested with full and complete legal and equitable title to all of the funds, property and estate embraced within the trusts hereof, both as to principal and income therefrom, subject only to the execution of the respective trusts herein created; and neither principal or the income of the Trust Estate or of any trust herein created shall be liable for the debts of any beneficiary hereof, not shall the same be subjected to seizure by any creditor of any beneficiary under any writ or proceeding at law, or in equity, and no beneficiary hereunder shall have any power to sell, assign, transfer, encumber or in any other manner anticipate or dispose of his or her interest in the Trust Estate, or the income produced thereby, prior to its actual receipt by such beneficiary.
Grantor, during his lifetime, and my son or sons herein named, while acting as Trustee hereunder, may, if deemed advisable by them as Trustee, distribute to either of Grantor's children, the whole or any part of the principal of their respective trusts, and their interests hereunder. And Grantor may, during his lifetime, if deemed advisable by him, and my son or sons herein named, while acting as Trustee hereunder, may, if deemed advisable by them as Trustee, terminate either or all of said trusts herein created for the respective benefit of my said sons, and distribute the principal of the trust to the persons entitled to receive the same under the terms hereof on the date of such termination.
The several trusts herein created shall continue and exist and be administered by the Trustee as herein provided (unless distributed by Grantor prior to his death, or distributed by Harry Holmes, Jr., John B. Holmes or Thomas J. Holmes, while they are acting as Trustee, as hereinbefore provided), for the period of fifteen (15) years from this date, provided that if, at the expiration of fifteen years, the trust shall be continued as to such beneficiaries' share or portion of such Trust Estate until such beneficiaries shall reach the age of twenty-one (21) years, or shall die, in either of which events, the trust as to such portion shall terminate, and provided further, and it is hereby made an express condition of this trust, that the same shall terminate twenty-one (21) years after the death of the last survivor of my said sons.
Upon the termination of the trust herein created or of said respective trusts, as herein provided, the entire Trust Estate then remaining in the hands of the Trustee, whether principal or accumulated income, shall be immediately divided, distributed and paid over to the persons who are entitled to receive the same in the proportions and according to the provisions of this agreement.
The question which we have to determine in this proceeding is whether the value at date of death of decedent of certain property transferred by him under the terms of the trust indenture executed January 20, 1935, is includible in his gross estate under the...
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