Provident Trust Co. of Philadelphia v. Comm'r of Internal Revenue (In re Estate of Thacher), Docket no. 17382.

• Decision Date: 28 May 1953
• Docket Number: Docket no. 17382.
• Citation: 20 T.C. 474
• Parties: ESTATE OF FRANK W. THACHER, DECEASED, PROVIDENT TRUST COMPANY OF PHILADELPHIA, CATHERINE L. THACHER, FRANKLIN WILLIAM THACHER, JR., AND JOHN HOOVER THACHER, EXECUTORS, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

20 T.C. 474

ESTATE OF FRANK W. THACHER, DECEASED, PROVIDENT TRUST COMPANY OF PHILADELPHIA, CATHERINE L. THACHER, FRANKLIN WILLIAM THACHER, JR., AND JOHN HOOVER THACHER, EXECUTORS, PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket no. 17382.

Tax Court of the United States.

Promulgated May 28, 1953.

1. Held, on the record that six conveyances of property to

six trusts for the benefit of settlor's five minor children and wife were not made in contemplation of death within section 811(c), Internal Revenue Code.

2. In the instrument creating the trust for the benefit of the wife, decedent retained a specific reversion that in case of divorce or legal separation, or in case his wife predeceased him, the corpus of the trust was to be paid over to him by the trustee. Held:

a. The wife's life interest terminable only by her predeceasing the decedent was not an interest intended to take effect in possession or enjoyment at or after his death within the meaning of section 811(c)(1)(C):

b. The wife's life interest is not excludable under section 811(c)(2) in the absence of evidence, as to which the burden was upon petitioners, that decedent's reversion retained, based upon divorce or legal separation, could not be valued or did not exceed 5 per cent of the corpus of the trust; and

c. The possibility of reverter in the case of divorce or legal separation being terminable only upon death of the husband, the wife's life estate was intended to take effect in possession or enjoyment at or after decedent's death within the meaning of section 811(c)(1)(C), and the value of such life estate is accordingly includible in the gross estate of the decedent.

3. Certain items allowed by the executors as claims against decedent's estate and paid to several of his children and alleged to be items of indebtedness to such children growing out of transactions many years prior to decedent's death, held, not to have been established as legal, enforceable claims against the estate and respondent's action in disallowing them as deductions is approved. Thorpe Nesbit, Esq., Logan Morris, Esq., Henry F. Stockwell, Esq., and Hugh Satterlee, Esq., for the petitioners.

Brooks Fullerton, Esq., for the respondent.

Respondent has determined a deficiency in estate tax in the amount of $511,345. The issues presented are:

(1) Whether the value of the corpus of six irrevocable trusts created by decedent in 1922 and 1924 for the benefit of his five minor children and of his wife are includible in his gross estate as transfers made in contemplation of death within section 811(c) of the Internal Revenue Code, and if so,

(2) Whether respondent erred in failing to eliminate from the value of such trusts proceeds of certain insurance policies on decedent's life which were included therein and which were taken out by him prior to the effective date of the Revenue Act of 1918.

(3) Whether respondent erred in failing to eliminate from the corpus of each trust such proportion of the proceeds of the insurance policies on decedent's life as the amount of premiums paid through January 10, 1941, out of the income of the trusts bore to the total amount of premiums paid for the life insurance.

(4) Whether respondent erred in including the taxable value of the corpus of the wife's trust, under section 811(c) of the Internal Revenue Code, the value of the widow's life interest.

(5) Whether debts alleged to be owed by decedent to certain of his children and totaling $3,469.40 are deductible from the gross estate.

Other issues presented by the pleadings have been settled by stipulation or abandoned on brief. All stipulated facts are so found and included herein by reference. All such facts necessary to an understanding of the issues are set out hereinafter in our Findings of Fact.

FINDINGS OF FACT

The petitioners are the duly qualified executors of the estate of Frank W. Thacher, who died testate on September 2, 1943, a resident of New Jersey. Decedent was born June 24, 1877, and his wife, Catharine L. Thacher, was born February 28, 1855. They remained married and were living together at the time of decedent's death.

The estate tax return in question was filed with the collector of internal revenue for the first district of New Jersey, the property included in the gross estate being valued as of the date of decedent's death.

On May 10, 1922, the decedent created five trusts by five separate deeds designating in each instance the Provident Trust Company of Philadelphia as trustee. Four of these trusts were for the benefit of decedent's four minor children. The fifth trust was for the benefit of decedent's wife, Catharine L. Thacher.

Subsequent to May 10, 1922, another child was born, and on January 8, 1924, the decedent created a trust for that child similar to the four trusts created in 1922 for his other children.

The corpus of each trust consisted of $100,000 in insurance upon the life of the decedent which he had taken out in prior years and approximately $95,000 in railway, utility, and industrial bonds or other securities. Each trust was by its terms made irrevocable, and the trustee was granted specifically the right to sell and dispose of all or any part of the investments, securities, real estate, and property which may from time to time or any any time comprise the capital or principal of said trust. The decedent retained no right to participate in the management of any one of the trusts or to direct the trustee in the exercise of the powers conferred upon it. Under the terms of each trust the trustee was directed to apply the income from the securities to the extent needed to pay premiums on policies of insurance held as part of the corpus, the balance of the income not so needed to be applied, if necessary, in the case of the trusts for the benefit of the children, for the support, maintenance, and education of the beneficiary, any excess not so used to be accumulated and paid over to the respective beneficiary when he or she reached 21 years of age; thereafter such income was to be paid to the beneficiary for life. At the death of the beneficiary in the case of each of the children's trusts, the corpus of the trust was to be paid to the issue of such beneficiary per stripes, and if no issue the beneficiary was given the right to dispose of such corpus under a general power of appointment. In case such power was not exercised, the corpus of the trust in each instance was to be paid over to the beneficiaries of the four other children's trusts. In none of these five trusts for his children did petitioner retain a reversionary interest and no incident of ownership in the policies of insurance included in each trust was retained by the decedent.

With respect to the trust for the benefit of decedent's wife, the provisions were the same with respect to the application of so much as was needed of the income of the securities to pay premiums upon insurance held as part of the corpus, and the powers granted the trustee were similar to those granted in respect of the trusts for the children. However, in this trust instrument the decedent retained a specific reversion by a provision that in case of divorce or legal separation or in case his wife predeceased him, the corpus of the trust was to be paid over to him by the trustee. This trust further provided that in case his wife survived him and remarried, the trust would terminate and the corpus be paid over to the trusts created in 1922 for his then four children.

The decedent, on May 10, 1922, and January 8, 1924, when the trusts were created, was 44 and 46 years of age, respectively, in excellent health, and actively engaged in business. He was a golf and tennis player and fond of sailing. He was prosperous and at the height of his productive activity. After creation of the trusts decedent still had substantial assets and a large yearly income.

At that time the principal source of decedent's income was the Florence Thread Company, a family enterprise which had been organized by his father and which he directed. Practically since its organization and during the period when it was operated by the decedent, this company had pursued a policy of speculation on the cotton market, buying cotton largely in excess of the amount necessary for its own manufacturing operations and with the sole purpose of selling such cotton at a profit. Over the course of years the profits realized by this company from its speculations in cotton exceeded its profits from manufacturing operations. It had, however, at times, large losses in such speculations.

In addition to the speculations carried on by the decedent in the business of the Florence Thread Company he was accustomed to speculate on his own account, in which activities he at times made large profits and at others sustained substantial losses.

Shortly prior to the creation of the five original trusts the decedent approached a friend in the investment business with the request that he procure corporate and industrial bonds which would give an average 6 per cent return on investment. He stated that he wished these securities in connection with the creation of a trust for his wife and children as he had made a large amount of money and desired while he had it to place it beyond his reach or the hazard of his speculations and thus guarantee to the members of his family support and maintenance irrespective of what his personal fortunes might be.

In making the foregoing six transfers in trust for the benefit of his wife and children, decedent's dominating motives were connected with life, and such transfers were not made in contemplation of death.

Among the decedent's papers at the time of his death were certain records indicating that some years prior to his death, when his children were minors, he had established certain savings accounts in their names and that the institution holding these accounts had liquidated, the payments on such accounts in...