McClintock v. Comm'r of Internal Revenue (In re Estate of Pardee)
| Citation | 49 T.C. 140 |
| Decision Date | 01 December 1967 |
| Docket Number | Docket No. 7249-65. |
| Parties | ESTATE OF MARVIN L. PARDEE, DECEASED, JAMES I. MCCLINTOCK AND NATIONAL BANK OF DETROIT, COEXECUTORS, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Charles D. Savage, for the petitioners.
Charles S. Stroad, for the respondent.
1. Decedent created a trust, naming himself as trustee, for the benefit of his children. The trustee was given the power to pay income or invade corpus in his discretion for the beneficiaries' education, maintenance, medical expenses, or other needs occasioned by emergency. In addition, the trustee was given the power to determine the division of the trust estate and to allocate receipts between principal and income. Held, that the trustee's power to distribute income or principal was limited by an external standard and not includable in his gross estate under sec. 2038(a)(1), I.R.C. 1954.
Held, further, that the managerial power retained by the trustee was not a power to designate the persons to enjoy the property within the meaning of sec. 2036(a)(2), I.R.C. 1954.
3. Held, further, that so much of the trust necessary to satisfy decedent's legal obligation under a divorce decree is includable in his gross estate under sec. 2036(a)(1), I.R.C. 1954.
4. Held, further, that real estate taxes on property included in decedent's gross estate had ‘accrued’ by the date of his death and are deductible under sec. 2053, I.R.C. 1954.
The respondent determined a deficiency in the Federal estate tax return for petitioner, the Estate of Marvin L. Pardee, in the amount of $298,980.68. One of the adjustments contained in the statutory notice of deficiency has been settled by the parties. The two issues remaining for decision are: (1) Whether all or any part of an inter vivos trust established by decedent for his children should be included in his gross estate under section 2036 or 2038, I.R.C. 1954;1 (2) whether certain real property taxes paid by the estate are deductible under section 2053. All of the facts have been stipulated and are so found. The stipulations and exhibits are incorporated herein by reference and are summarized below.
James I. McClintock and the National Bank of Detroit are the duly appointed coexecutors of the Estate of Marvin L. Pardee, deceased, who died on March 7, 1962. The estate tax return for his estate was filed with the district director of internal revenue at Detroit, Mich., on June 7, 1963.
Marvin L. Pardee (hereinafter referred to as decedent) was married to Grace Gardner Pardee on February 24, 1938. They had three children, Martha Joanna Pardee born July 17, 1940, Susan Lee Pardee born April 13, 1944, and William Gardner Pardee born July 15, 1948.
On December 31, 1948, decedent executed a trust indenture, naming himself as trustee and his children as beneficiaries, which created the ‘Marvin L. Pardee Trust.’ The trust was by its terms irrevocable and provided, in pertinent part:
1. * * * the Donor does hereby declare that the delivery of such cash and securities and the creation of this Trust is not intended by him to discharge any legal obligation he may owe to any Beneficiary hereunder and that he will continue to discharge all such obligations from his own funds.
3. The Trustee is hereby empowered * * * to determine the division and divide the Trust Estate and to allocate receipts and expenditures between income and principal accounts * * *
4. The Trustee shall hold and dispose of the principal and income of the said Trust Estate for the equal benefit of the Beneficiaries in the following manner and for the following uses and purposes:
(c)(i) The Trustee may distribute in equal shares to the Beneficiaries from time to time, so much of the corpus of said Trust as in the discretion of said Trustee shall be necessary for the education, maintenance, medical expenses, or other needs of the Beneficiaries occasioned by emergency * * *
(ii) During the period beginning with the creation of this Trust and ending July 15, 1969 * * * , the Trustee may distribute in equal shares to the Beneficiaries of this Trust so much of the income of said Trust as in the discretion of said Trustee is required for the education, maintenance, medical expenses, or any other needs occasioned by emergency, and any income not so distributed during such period shall be accumulated in equal shares * * * 8. Each and every Successor Trustee shall have the identical powers, rights, duties and obligations of the Trustee named in this Indenture.
During the period from July 15, 1969, to July 15, 1978, all of the current net income is to be payable to the beneficiaries, with the trustee retaining the right to invade corpus as above. The trust is to terminate on July 15, 1978, or on the earlier death of the two youngest Pardee children. Upon termination, the corpus and any accumulated income are to be distributed to the children or their surviving issue, with a contingent remainder to Grace Gardner Pardee if none survive, or to charity if she does not survive. Decedent was the sole trustee under the Marvin L. Pardee Trust from its creation until his death.
On June 8, 1955, decedent and Grace Gardner Pardee entered into a separation agreement which provided, in part:
4. The Husband shall pay to the Friend of the Court * * * , as support and maintenance for the children of the parties hereto, the sum of Two Hundred and Fifty Dollars ($250.00) for each child * * * on the first day of each and every month * * * until such child attains the age of eighteen (18) years, or until the further order of the Court, and subject to the provisions of paragraph 5, infra. (Paragraph 5 provided that the husband was to pay all reasonable costs for the children's education and summer camp vacations, with a prorata reduction in support payments during the months the child was resident at an educational institution or summer camp.)
6. The Husband may, in his sole discretion, discharge the obligations contained in paragraphs 4 and 5, supra, by payment of income or principal from that certain trust created on December 31, 1948, by the Husband as Grantor and as Trustee for the benefit of the children of the parties hereto.
The separation agreement was incorporated in a divorce decree entered by the Circuit Court for Wayne County, Mich., on June 15, 1955.
From 1956 to 1961 the trustee of the Marvin L. Pardee Trust made distributions to or for the benefit of his children including birthday gifts, Mother's Day gifts and Christmas gifts for Grace Gardner Pardee. With the exception of a $500 payment on June 17, 1960, to the Lost Trail Camp for William Gardner Pardee, it is stipulated that none of the trust payments were in satisfaction of the obligations imposed upon Marvin L. Pardee individually under the terms of the separation agreement incorporated in the divorce decree.
With the exception of the payments made to the district director of internal revenue for Federal income taxes during the calendar years ending 1949 through 1961, and the distributions described above, substantially all of the net income from the operations of the Marvin L. Pardee Trust was reinvested in income-producing properties and securities.
The fair market value of the properties owned by the Marvin L. Pardee Trust was $681,425.07 as of the date of the decedent's death. None of the trust properties were included on the Federal estate tax return filed by the Estate of Marvin L. Pardee.
On Schedule K of the Federal estate tax return, the petitioner claimed deductions for 1962 real estate property taxes as follows:
+-------------------------------+
¦Taxing unit ¦Amount ¦
+---------------------+---------¦
¦City of Detroit ¦$1,301.38¦
+---------------------+---------¦
¦Village of Leonard ¦36.36 ¦
+---------------------+---------¦
¦City of Highland Park¦870.19 ¦
+---------------------+---------¦
¦City of Walled Lake ¦61.51 ¦
+-------------------------------+
All of the above taxing units are located within the State of Michigan. Each of the parcels of real estate to which the property taxes were attributable was owned by Marvin L. Pardee on the date of this death.
OPINIONRespondent relies upon Code sections 2036(a)(1), 2036(a)(2),2 and 2038(a) (1)3 to support the inclusion of the Pardee Trust in the decedent's gross estate. Respondent contends that the entire corpus and accumulated income4 would be includable under sections 2038(a)(1) and 2036(a)(2) but concedes that only a portion of the trust assets, as explained below, would be includable under section 2036(a)(1). We have concluded that respondent is in error as to sections 2038(a)(1) and 2036(a)(2) but is correct as to section 2036(a)(1).
Under section 2038(a)(1), retention of a power by a grantor-trustee to pay out or retain corpus and income does not lead to inclusion of the trust in the gross estate where the trustee is held to an objective standard of conduct in the exercise of the power. Jennings v. Smith, 161 F.2d 74 (C.A. 2, 1947). Respondent concedes the correctness of this rule but contends that the trustee's power here to invade ‘so much of the corpus of said Trust as in the discretion of said Trustee shall be necessary for the education, maintenance, medical expenses, or other needs of the Beneficiaries occasioned by emergency’ is so broad as to negate an objective standard and to give the trustee power to terminate the trust through corpus and income distributions. Specifically, respondent contends that the language ‘other needs * * * occasioned by emergency’ is fatal to petitioner's case.5
Deciding whether a power is so broad as to permit termination of a trust or is subject to judicially enforceable, objective standards requires, of course, an interpretation of the trust indenture. In the interpretation of a trust indenture it is imperative that a phrase, such as ‘other needs * * * occasioned by emergency,‘ here...
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