Provident Tradesmens Bank & Trust Co. v. Comm'r of Internal Revenue (In re Estate of Holtz), Docket No. 88457.
| Decision Date | 10 April 1962 |
| Docket Number | Docket No. 88457. |
| Citation | 38 T.C. 37 |
| Parties | ESTATE OF LEON HOLTZ, DECEASED, PROVIDENT TRADESMENS BANK AND TRUST COMPANY, EXECUTOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Harry T. Devine, Esq., for the petitioner.
Frederick A. Levy, Esq., for the respondent.
Irrevocable transfer in trust directing corporate trustee to distribute income to settlor for life and as much of principal as trustee may think desirable for the welfare, comfort, and support of settlor, or for his hospitalization or other emergency needs, held not to be a completed gift of the remainder interest in the principal of the trust for gift tax purposes.
Respondent determined deficiencies in gift tax against petitioner for the taxable years 1953, 1954, and 1955 in the amounts of $61,130.90, $22.05, and $8,543.82, respectively.
The issue for decision is whether the transfers in trust of certain property, made by Leon Holtz on June 12, 1953, and January 18, 1955, were completed gifts for purposes of Federal gift tax. The deficiency for 1954 is the result of a technical adjustment dependent on the decision of the issue for 1953.
Some of the facts have been stipulated and are found accordingly.
Provident Tradesmens Bank and Trust Company is the surviving executor under the will of Leon Holtz (hereinafter referred to as Leon or settlor), who died August 18, 1955. It filed gift tax returns for the calendar years 1953-1955, on behalf of Leon with the district director of internal revenue, Philadelphia, Pennsylvania.
Sometime in late 1952 or early 1953, Leon discussed creating a trust with a trust officer of Land Title Bank and Trust Company, now Provident Tradesmens Bank and Trust Company. The trust principal was to consist primarily of a number of small mortgages having a value of between $300,000 and $400,000. After being appraised of the charge the bank would make for handling the trust, Leon authorized the trust officer to have an attorney prepare a deed of trust which, according to the testimony of the trust officer, would provide that ‘he (Leon) would receive all of the (trust) income as long as he lived, and that he (Leon) would have the right to use principal, as he found necessary.’ A deed of trust was prepared pursuant to Leon's instructions with Leon as the settlor and the bank as sole trustee which was dated and executed by the parties on June 12, 1953. The deed of trust provided, in part, as follows:
FIRST
Trustee shall keep the principal of this trust invested and shall distribute the net income therefrom and the principal thereof as follows:
A. During the lifetime of Settlor:
1. The income shall be paid to him or to his order, or upon his direction, shall be accumulated and added to the principal.
2. As much of the principal as Trustee may from time to time think desirable for the welfare, comfort and support of Settlor, or for his hospitalization or other emergency needs, shall be either paid to him or applied directly for his benefit by Trustee.
B. Upon the death of Settlor, if Settlor's wife, FANNIE FLORENCE HOLTZ, survives him:
1. During Settlor's wife's lifetime:
a. The income shall be paid to her; and
b. As much of the principal as Trustee may from time to time think desirable for her welfare, comfort and support shall be either paid to her or else applied directly for her benefit by Trustee, which shall interpret this power liberally.
C. Upon Settlor's wife's death, if she survives Settlor, the then-remaining principal shall be paid over unto the Estate of Settlor's wife.
D. Upon Settlor's death, if he survives the death of his wive, the then-remaining principal shall be paid over unto the Estate of Settlor.
A. Settlor or any other person, upon approval and acceptance by Trustee, may add to the principal of this trust by deed or will or otherwise.
B. It is hereby expressly declared by Settlor that he has been fully advised as to the legal affect of the execution of this Deed of Trust and informed as to the character and amount of the property hereby transferred and conveyed; and further that he has given consideration to the question whether the transfer herein contained shall be revocable or irrevocable and he hereby declares the same to be irrevocable and that it shall without any power in Settlor at any time to revoke, change or annul any of the provisions herein contained; except that Settlor and others may hereafter bring other properties within the operation of this Deed of Trust.
Execution of the deed of trust took place at Leon's home. Prior to affixing his signature to the deed, Leon asked the attorney, who prepared it, and the trust officer above mentioned whether he would have ‘enough money’, and the trust officer replied that ‘it (the trust) provides for the payment of all income to you and also you can have money out of the principal.’ The trust officer assured Leon that the bank ‘would be liberal in giving him (Leon) money out of the corpus.’ Leon inquired as to whether he could have money from the trust to purchase a new car, and the trust officer said he could. Leon's wife, Fannie, signed the deed of trust as one of the witnesses.
Pursuant to the deed of trust, on June 12, 1953, Leon transferred to the trustee property having a value of $384,117. This property consisted of over 200 mortgages, most of which had a value of less than $2,000, which Leon had kept until that time in the cellar of his home. The mortgages and the records pertaining thereto were in a state of utter confusion. Leon had made a great many mistakes in billing the mortgagors, he had failed to record some of the payments of principal, he had not kept accurate records of the tax receipts, he had thrown out some of the fire insurance policies, and, in some cases, the envelopes in which the mortgages had been sent from the title companies had not been opened. On January 18, 1955, Leon transferred an additional $50,000 in cash to the trustee to be held under the terms of the trust created June 12, 1953.
Leon was 80 years old at the time the above trust was created and Fannie was 61. Leon died in 1955 and Fannie died in 1958. In 1950 Leon and Fannie executed an agreement authorizing Leon, with Fannie's consent, to bind himself to contribute up to $475,000 to the Jewish National Fund of America and the National Committee for Labor Israel, Inc., for the purpose of constructing a trade school in Israel. The agreement also provided in substance that Leon should pay Fannie $50,000, that he should execute a will under which she would receive one-half of his estate if she survived him, and that he would not transfer any of his property, except the amount first stated above, without her consent. Leon made cash gifts to Fannie in the amounts of $29,695.28, $31,749.08, and $59,266.08, during the years 1950, 1951, and 1952, respectively.
Leon's contribution to the two organizations mentioned above was accomplished under agreements dated November 18, 1950, December 4, 1952, and March 26, 1953, which indicate that $300,000 in cash or property had been or was to be delivered to the organizations by the end of 1952 and the remaining $175,000 was placed in trust in March 1953 to pay the income to Leon and Fannie for life and then to be distributed to the two organizations.
Leon and Fannie filed joint income tax returns for the years 1951-1955, reporting net income or taxable income as follows:
+----------------+
¦1951¦$32,342.72 ¦
+----+-----------¦
¦1952¦36,504.71 ¦
+----+-----------¦
¦1953¦29,727.92 ¦
+----+-----------¦
¦1954¦23,709.72 ¦
+----+-----------¦
¦1955¦20,486.32 ¦
+----------------+
At some time before or after the trust of June 12, 1953, was established, Leon told the trust officer who had arranged for the trust that he thought he was worth about a million dollars.
The estate tax return for Leon, after an Internal Revenue Service audit wherein all adjustments were agreed to by the executors, shows an adjusted gross estate of $664,295.61, computed as follows:
+----------------------------------------------------------------+
¦Real estate ¦$5,700.00 ¦ ¦
+----------------------------------+----------+------------------¦
¦Mortgages, notes, and cash ¦59,673.57 ¦(cash, $33,863.99)¦
+----------------------------------+----------+------------------¦
¦Jointly owned property ¦5,632.29 ¦ ¦
+----------------------------------+----------+------------------¦
¦Other property ¦12,482.17 ¦ ¦
+----------------------------------+----------+------------------¦
¦Transferred during decedent's life¦610,655.01¦ ¦
+----------------------------------+----------+------------------¦
¦Total ¦694,143.04¦ ¦
+----------------------------------+----------+------------------¦
¦Funeral, executor, and ¦ ¦ ¦
+----------------------------------+----------+------------------¦
¦administrative expenses ¦10,489.88 ¦ ¦
+----------------------------------+----------+------------------¦
¦Debts of decedent ¦19,357.55 ¦ ¦
+----------------------------------+----------+------------------¦
¦Total ¦29,847.43 ¦ ¦
+----------------------------------+----------+------------------¦
¦Adjusted gross estate ¦664,295.61¦ ¦
+----------------------------------------------------------------+
Leon left his surviving spouse a life estate in various properties which qualified for a marital deduction in the amount of $440,625.54.1
Sometime in 1954, Leon became confined to a nursing home and on five different occasions Fannie took his hospital bills, totaling $1,175.19, to the trustee for payment. There were not sufficient funds in the trust income...
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