Marshall v. Comm'r of Internal Revenue (In re Estate of Marshall) , Docket Nos. 147-67

• Decision Date: 04 February 1969
• Docket Number: Docket Nos. 147-67,1178-68.
• Citation: 51 T.C. 696
• Parties: ESTATE OF DORA N. MARSHALL, DECEASED, CHARLES D. MARSHALL, AIKEN W. FISHER, AND CONTINENTAL BANK AND TRUST COMPANY, EXECUTORS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

51 T.C. 696

ESTATE OF DORA N. MARSHALL, DECEASED, CHARLES D. MARSHALL, AIKEN W. FISHER, AND CONTINENTAL BANK AND TRUST COMPANY, EXECUTORS, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket Nos. 147-67

1178-68.

Tax Court of the United States.

Filed February 4, 1969.

Paul G. Rodewald and James G. Park, for the petitioners.

Albert J. O'Connor, for the respondent.

In December 1930 decedent transferred securities valued at $374,790 to her husband. He promised to make full restitution, and did so by the conveyance of property worth $616,021.66 to two trusts, created on Mar. 10 and 17, 1931, under which decedent was given the life income therefrom plus general testamentary powers of appointment over the corpora, with a gift in default of exercise of the powers to her intestate heirs. In 1943 decedent released her powers. Held: In substance and practical effect decedent transferred property to the trusts to the extent of her claim for restitution against her husband; and the transaction, therefore, constituted a transfer by decedent after Mar. 3, 1931, with sec. 2036, I.R.C. 1954. Decedent received consideration for her relinquishment of the claim measured by the difference between the date-of-transfer value of the trust corpora and the value of the claim. Held, further, decedent's release of her reserved testamentary powers of appointment was not a taxable gift. Sec. 1000(e), I.R.C. 1939, construed. Estate of Ellie G. Canfield, 34 T.C. 978 (1960), affirmed on another issue 306 F.2d 1 (C.A. 2, 1962), followed.

FEATHERSTON, Judge:

Respondent determined deficiencies in petitioner's estate tax in docket No. 147-67 in the amount of $1,055,558.70 and in petitioners' gift tax in docket No. 1178-68 in the amount of $66,565.92, plus an addition to the gift tax of $16,641.48 under section 3612(d)(1) of the Internal Revenue Code of 1939.

Certain issues have been settled, and the addition to the gift tax has been conceded by respondent. The only issue remaining in the estate tax case is whether, within the meaning of section 2036,¹ decedent made a transfer of property after March 3, 1931, retaining a life interest therein, in connection with the creation of two trusts on March 10, 1931, and March 17, 1931. The sole issue in the gift tax case is whether decedent's release on January 26, 1943, of general testamentary powers of appointment given to her under these trusts, constituted a taxable gift within the meaning of section 1000 of the Internal Revenue Code of 1939.

FINDINGS OF FACT

All the facts have been stipulated and are so found.

Petitioners in both proceedings are the executors of the Estate of Dora N. Marshall (referred to herein as Dora or decedent), who died January 22, 1964, a resident of North Coventry Township, Chester County, Pa. The address of the petitioners is 205 High Street, Pottstown, Pa. 19464. The estate tax return was filed with the district director of internal revenue at Philadelphia, Pa., on April 21, 1965. The notice determining the deficiency in estate tax was mailed to petitioner on October 14, 1966.

The notice determining the gift tax deficiency for the year 1943 was mailed to petitioners on February 1, 1968. On March 8, 1968, the petitioners filed a gift tax return for the year 1943 with the district director of internal revenue at Philadelphia, Pa., in whose district the decedent resided in 1943, reporting the release of the testamentary powers of appointment upon which the respondent based the asserted gift tax deficiency, and claiming that no taxable transfer was made by such release.

The controversies as to both the estate and gift tax deficiencies stem from the creation of two trusts, on March 10, 1931, and March 17, 1931, by decedent's husband, Charles D. Marshall (hereinafter Charles). Prior to December 31, 1930, Dora owned 2,883 shares of stock of McClintic-Marshall Corp. (hereinafter McClintic). Six of the children of Charles and Dora and a brother of Charles each owned 323 shares of McClintic. In December 1930 Charles told Dora, the children, and his brother that in order to consummate a pending acquisition of McClintic by Bethlehem Steel Corp. it was necessary for him to control all the McClintic stock which they owned. He told them that if they would transfer the stock to him, he would see that proper restitution was made and that they would suffer no loss. Dora, the children, and the brother agreed to this arrangement and, on or about December 31, 1930, transferred their McClintic shares to Charles.

On February 23, 1931, Charles prepared a memorandum acknowledging that he owed Dora $374,790— the value of the stock she had transferred to him. At or about that time, Charles submitted to Dora and the children the text of two trust instruments which he subsequently executed, and asked them whether the trust provisions would be satisfactory restitution for the stock they had transferred to him. They replied in the affirmative.

On March 10, 1931, Charles executed a trust indenture and transferred certain property to the Union Trust Co. of Pittsburg (now Mellon National Bank & Trust Co.), the trustee named therein. On March 17, 1931, Charles executed another trust indenture and transferred certain property to the Fidelity Trust Co. (now Pittsburg National Bank), the trustee named herein. The property placed in trust under these instruments consisted of stocks and bonds of various corporations, not including McClintic, as well as cash.

Under each of these trusts, the property was divided into 18 shares. shares. Pertinent to the present controversy, the income of 6 shares of each trust was made payable to Dora. She was also given general testamentary powers of appointment over their corpora, subject to the proviso that, in default of such appointment, the property would be distributed to such persons as would be entitled thereto under the intestate laws of Pennsylvania had she died seized and possessed of the trust estate. Respondent has determined that; although Charles was the ostensible settlor of the trusts, Dora was in reality one of the settlors, and has included the corpora in her gross estate under section 2036. Dora released the testamentary powers of appointment on January 26, 1943, and respondent has determined that she thereby incurred gift tax liability under section 1000 of the Internal Revenue Code of 1939.

The fair market value of the shares of McClintic stock transferred to Charles by Dora on December 31, 1930, was $374,790. The aggregate fair market value of the trust property in which Dora was given a life estate and powers of appointment, was $616,021.66 at the time the trust indentures were executed; $442,054.21 on the date of her release of the testamentary powers; and $1,605,289.96 (after reflecting termination expenses of $19,235) on the date of her death on January 22, 1964. Dora received income distributions from the inception of the two trusts to the date of her death in the aggregate amount of $1,002.551.91.

ULTIMATE FINDINGS OF FACT

Dora made a transfer in trust with a retained life interest after March 3, 1931, to the extent of $374,790. She received consideration therefor in the amount of $241,231.66.

Dora's release in 1943 of her reserved testamentary powers of appointment was not a taxable gift.

OPINION

Estate Tax

Section 2036² requires the inclusion of property in decedent's gross estate where the decedent has made an inter vivos ‘transfer’ of any interest in that property, and has ‘retained’ for his life the right to the income therefrom. Excepted are transfers made before March 4, 1931, and transfers made for ‘adequate and full consideration in money or money's worth.’ Stated simply, the purpose of the section is to impose an estate tax with respect to property which a decedent transferred during his life but in which he retained the right to economic benefit until his death. First National Bank of Shreveport v. United States, 342 F.2d 415, 416-417 (C.A. 5, 1965) (per curiam); Greene v. United States, 237 F.2d 848, 852 (C.A. 7, 1956); Warren & Surrey, Federal Estate and Gift Taxation 257 (1961). The taxability of a transfer under section 2036 is not determined by the refinements of conveyances or the technicalities of contracts or trust indentures, but by the substance and practical effect of what was done. See Helvering v. Hallock, 309 U.S. 106, 112, 114 (1940).

Petitioners contend that Dora made no ‘transfer,‘ within the meaning of section 2036, after March 3, 1931— that the only transfer she made was her shares in McClintic to Charles in December 1930, prior to the effective date of section 2036; that Charles, not Dora, made the transfers in trust; and that Dora did not, therefore, ‘retain’ the income from the trusts for her life. On these grounds, petitioners maintain that section 2036 does not apply.

In evaluating the merits of petitioners' arguments we do not write upon a blank slate. After Charles' death on May 16, 1945, the Commissioner sought, under 1939 Code section 811(c), as amended, to include in Charles' gross estate the remainder interests in the two trusts, on the ground that Charles had retained a possibility of reverter ³ in the property. This Court rejected the Commissioner's determination, holding that the reversionary interests, if any, arose not ‘by the express terms of the instrument of transfer,‘ as required by 1939 Code section 811(c)(2), but ‘by operation of law,‘ and that the property, therefore, was not includable in Charles' estate. Estate of Charles D. Marshall, 16 T.C. 918 (1951). In affirming, the Court of Appeals noted that the Commissioner did not challenge this Court's finding that ‘the trusts were created in consideration of and as restitution for the $374,790 stock’ which Dora transferred to Charles in December 1930; accordingly, that court treated the Commissioner's claim as having been reduced ‘in consonance with the determined consideration under * * * (the predecessor of section...