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

• Decision Date: 05 October 1951
• Docket Number: Docket Nos. 19480,20519.
• Citation: 17 T.C. 597
• Parties: ESTATE OF MYRTLE H. NEWBERRY, DECEASED, JOHN J. NEWBERRY, JR., EDGAR A. NEWBERRY, WALTER C. SCHULZ AND JOHN J. NEWBERRY, EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOHN J. NEWBERRY TRUST NO. 1, JOHN J. NEWBERRY TRUST NO. 2, JOHN J. NEWBERRY TRUST NO. 3 AND JOHN J. NEWBERRY TRUST NO. 4, WALTER C. BAKER AND THOMAS L. ZIMMERMAN, TRUSTEES, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 597

ESTATE OF MYRTLE H. NEWBERRY, DECEASED, JOHN J. NEWBERRY, JR., EDGAR A. NEWBERRY, WALTER C. SCHULZ AND JOHN J. NEWBERRY, EXECUTORS, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.JOHN J. NEWBERRY TRUST NO. 1, JOHN J. NEWBERRY TRUST NO. 2, JOHN J. NEWBERRY TRUST NO. 3 AND JOHN J. NEWBERRY TRUST NO. 4, WALTER C. BAKER AND THOMAS L. ZIMMERMAN, TRUSTEES, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket Nos. 19480

20519.

Tax Court of the United States.

Promulgated October 5, 1951.

Decedent and her husband created reciprocal trusts. After amendment there remained in each, at the time of her death, the right to change the trust beneficiaries. The trusts further provided that trust income was to be accumulated for the benefit of the two children of decedent and husband, until attainment by the child of the age of 30 years. Held, the decedent's power, at the date of death, to change beneficiaries requires inclusion of the trust corpus and accumulated income in her gross estate under section 811(d)(2), Internal Revenue Code. Montgomery B. Angell, Esq., for the petitioners.

Francis X. Gallagher, Esq., for the respondent.

The tax liability involved in Docket No. 19480 is for estate tax deficiency in the amount of $840,467.79. In Docket No. 20519, there is involved transferee liability for the same deficiency. The proceedings were consolidated for hearing, and it was stipulated at the hearing that if it be determined in the principal proceeding there is a deficiency in the estate tax, there will be a corresponding liability in the transferee proceeding.

The questions for our determination are whether the value of certain trusts created by the decedent's husband, John J. Newberry, in 1934 and 1935 are includible in the decedent's gross estate and, if so, whether the income accrued thereon and undistributed at the decedent's death is includible in her gross estate. Other issues raised by the pleadings have been conceded by the parties.

These proceedings were submitted on a stipulation of facts and oral evidence; The stipulation of facts are so found and are incorporated herein by this reference. They may be epitomized as follows, along with facts that are found from the oral evidence.

FINDINGS OF FACT.

The decedent, Myrtle H. Newberry, died on May 9, 1944, a resident of New Jersey.

On the date of the decedent's death there were in existence eight inter vivos trusts, of which four were created by John J. Newberry, the decedent's husband, and four were created by the decedent, as follows: On each of the dates July 6, 1934, and December 26, 1935, the decedent and her husband John J. Newberry each created two trusts, one in favor of their daughter, Myrtle Virginia, and other in favor of their son, John J., Jr.

The corpus of each of the trusts as originally created consisted primarily of an equal number of shares of stock of the John J. Newberry Co.

The language of the eight trusts was substantially the same, save for the differences in names and certain immaterial variations. Hereinafter when reference is made to the exact language of the trusts, or any amendments thereto, it will be taken from the John J. Newberry Trust No. 1.

Trust No. 1, dated July 6, 1934, named John J. Newberry as grantor and John J. Newberry and his wife, the decedent, as trustees. The trust instrument provided, in part, as follows:

WHEREAS the Grantor is desirous of securing an income for his daughter MYRTLE VIRGINIA NEWBERRY during her life by creating a trust for said purpose, * * *

SIXTH: The Trustees shall accumulate the entire net income of the Trust Fund * * * for the benefit of MYRTLE VIRGINIA NEWBERRY, the daughter of John J. Newberry, until she shall arrive at twenty-five years of age, at which time the Trustees are directed to pay said accumulated net income and thereafter the entire net income of the Trust Fund in quarterly installments to said Myrtle Virginia Newberry during her life.

FOURTEENTH: The Trustee Myrtle H. Newberry shall have the power at any time during her life by instrument in writing delivered by her to the Trustees to modify, alter, amend or revoke this instrument in whole or in part including the right to change the beneficiaries herein, provided, however, she shall not have power to revest the securities deposited herein, or which may be hereafter deposited herein or the Trust Fund in John J. Newberry, the Grantor, and provided, further, that she may not revest the principal or income in the Grantor John J. Newberry.

EIGHTEENTH: Should any of the Trustees hereinbefore designated resign his or her trust or die before the Trust is completely executed, then the surviving Trustee or Trustees may appoint and nominate a successor Trustee to the one who has resigned, or become incapacitated to carry out the duties of Trustee, or may have died, and the Trustee so nominated upon qualifying by signifying his acceptance in writing to the other Trustee or Trustees, shall succeed to all the rights, powers and discretions of the other Trustee or Trustees hereinbefore granted, excepting that no such succeeding Trustee shall have the power of modifying, altering, amending or revoking this instrument in whole or in part, or of changing the beneficiaries herein, excepting that any succeeding Trustee nominated by the Trustee John J. Newberry to succeed Myrtle H. Newberry as Co-Trustee, or to succeed the Trustee who shall have succeeded Myrtle H. Newberry, shall during the life of John J. Newberry have the right to alter, amend, or revoke this instrument in whole or in part, including the right to change the beneficiaries herein, provided, however, that at no time shall such succeeding Trustee have the power to revest the securities deposited herein or which may hereafter be deposited herein, or the Trust Fund in the Grantor John J. Newberry.

The provision included in the trusts to modify, alter, amend or revoke the instruments was inserted because the named beneficiaries were very young, in school, and neither the decedent nor her husband knew what kind of lifemates they (the beneficiaries) might choose. The trust was to continue until the death of the survivor of Myrtle Virginia, the daughter, and her mother, the decedent. If the mother survived the daughter, on the daughter's death the income was to be paid to the daughter's children and the issue of a deceased child or children in equal shares, but if the daughter died leaving no children or issue of deceased children, the net income was to be paid to the decedent during her life. On the termination of the trust either on the death of Myrtle Virginia or of the decedent, the ‘principal of the said trust fund‘ was payable to the daughter's children and the issue of deceased children, and if there were none, to the daughter's brother or to his issue, and if he left no issue to the grantor's sisters and the issue of any deceased sister, and if there were no sisters or issue of deceased sisters then ‘to the next-of-kin of Myrtle Virginia Newberry as determined by the statutes of New Jersey.‘

on six different dates the decedent and her husband executed 16 pairs of practically identical amendments, or a total of 32 amendments to or partial revocations of the trust instruments. Paragraph Sixth was amended on November 30, 1942, as follows:

SIXTH: The Trustees shall accumulate the entire net income of the Trust Fund * * * for the benefit of MYRTLE VIRGINIA LEACH, the Daughter of John J. Newberry, until she shall arrive at thirty years of age, at which time the Trustees are directed to pay said accumulated net income and thereafter the entire net income of the Trust Funds in quarterly installments, to said Myrtle Virginia Leach, during her life.

Paragraphs Fourteenth and Eighteenth above mentioned were amended on May 31, 1943, as follows:

Fourteenth. Myrtle H. Newberry shall have the power at any time during her life, by instrument in writing delivered by her to the Trustees, to change the beneficiaries herein, provided, however, that such beneficiaries shall be either the descendants of Myrtle H. Newberry, spouses of such descendants or donees described in Section 812(d) of the U.S. Internal Revenue Act of 1939. ¹ Said Myrtle H. Newberry shall not have power to vest the securities deposited herein or which may be hereafter deposited herein or the trust fund in John J. Newberry, the Grantor, and provided further that she may not revest the principal or income in the Grantor, John J. Newberry.

Eighteenth; Should any of the Trustees hereinbefore designated, resign his or her Trust or die before the trust is completely executed, then I appoint WALTER C. BAKER and THOS. L. ZIMMERMAN, JR., as successor Trustees, in the order named, to the one who has resigned or become incapacitated to carry out the duties of the Trust, or may have died, and the Trustees so nominated, upon qualifying by signifying his acceptance in writing to the other Trustee or Trustees, shall succeed to all the rights, powers and discretions of the other Trustee or Trustees hereinbefore granted. Should the said WALTER C. BAKER or THOS. L. ZIMMERMAN, JR., resign his trust or become incapacitated to carry out the duties of Trustee, or die before the trust is completely executed, then and in either of those events, I appoint my son, JOHN J. NEWBERRY, JR., in place of the one whose office of Trustee is vacated and upon the death, resignation or incapacity or failure to qualify of the said John J. Newberry, Jr. or his co-trustee, I appoint the Guaranty Trust Company of New York City as co-trustee, with the surviving individual Trustee, and such corporate Trustee shall have all the rights, powers and discretions of the other Trustee. Upon the resignation, death or incapacity to serve, of the said individual Trustee, The Guaranty Trust Company is empowered to act as sole Trustee of this trust. The Trustees are granted and given by the Grantor the amplest and fullest power to...