SAFE DEPOSIT AND TRUST COMPANY v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 19 June 1940 |
| Docket Number | Docket No. 86394,86395. |
| Citation | 42 BTA 145 |
| Parties | SAFE DEPOSIT AND TRUST COMPANY OF BALTIMORE, TRUSTEE UNDER WILLS OF R. J. REYNOLDS, AND KATHARINE S. JOHNSTON, AND DEED OF KATHARINE S. JOHNSTON AND DECREE OF SUPERIOR COURT OF FORSYTH COUNTY, N. C., ETC., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. ESTATES ADMINISTRATION, INC., ADMINISTRATOR OF THE ESTATE OF ZACHARY SMITH REYNOLDS, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Charles McH. Howard, Esq., for the petitioners.
Brooks Fullerton, Esq., for the respondent.
These proceedings come before us on the Commissioner's determination of a deficiency in estate tax of $8,520,820.55, less any credit for inheritance taxes paid to the State of North Carolina. They were consolidated for hearing, an identical deficiency notice having been sent to the Safe Deposit & Trust Co., of Baltimore, the testamentary trustee of R. J. Reynolds, deceased, and to Moses Shapiro, the administrator d. b. n. of Zachary Smith Reynolds, the decedent involved here.
The decedent died on July 6, 1932, still a minor, having attempted to exercise by an instrument purporting to be a will executed in New York, which he declared to be his domicile, a general power of appointment given him under the three several trusts created by his father and mother to dispose of the trust corpora. The Commissioner seeks to include decedent's interest in these trusts in his gross estate under section 302 (a), and more specifically under section 302 (f), of the Revenue Act of 1926, the questions before us being (1) whether the decedent, as a minor having North Carolina as his domicile of origin, had the requisite capacity in the circumstances to transfer, and if so, did transfer any property under the power within the meaning of the act; and, if not, (2) whether decedent's interest in any of the trusts is includable in his gross estate as property properly constituting part of his estate at the moment of death. The facts are largely documentary in character and that part of them is stipulated. We set out only such facts as are necessary to an understanding of the questions raised, but incorporate by reference all facts stipulated.
FINDINGS OF FACT.
The trust settlements involved include the trusts created by the will of Richard Joshua Reynolds, decedent's father, which was probated in 1918; the will of his mother, Katharine S. Johnston (her name by a later marriage), probated in 1924; and a deed of trust executed by Katharine Johnston on December 29, 1923, during her lifetime. These instruments are part of the printed record in certain proceedings hereinafter referred to in the Superior Court for Forsyth County, North Carolina, which were put in evidence in this case and are incorporated here by reference.
1. R. J. Reynolds's trust. — The pertinent provisions will be briefly summarized here. R. J. Reynolds in his will (item fourth) left in trust to his wife one-third of R. J. Reynolds Tobacco Co. stock, the trustee to pay her the income and, on the trust's termination, the principal, which she might bequeath, but any part of her interest left to their children was to become part of the trust estate created for their benefit by the same instrument, with a remainder over of his wife's interest, if she should die intestate. He also left in trust his children's shares in his entire estate. The trustee was authorized to pay all the income from these shares to the testator's wife until they severally should reach 21 years, and then specified sums to the children until they should reach 28 years of age, when the trust as to each child should terminate and his share of the corpus be paid over to him. There then follows the provision most pertinent here, which provides in substance that any child beneficiary dying before the age of 28 may bequeath his interest to others, and that the trustee shall hold for such legatees until the trust would have terminated had the child lived to the age of 28, and then distribute to them; but that if any child shall die intestate before 28, then to his "living issue", but if he die without children of his own, then his remainder shall pass to the testator's other children and grandchildren per stirpes. The general granting clause of the residue of the estate, since its language has been brought in issue, we also set out in part, as follows:
ITEM FOURTH
All the rest, residue and remainder of my estate of every kind, character and description, real, personal and mixed, and wheresoever situated, I direct shall be divided by my executor, said Safe Deposit & Trust Company, between and among my wife, and children living at my death, or thereafter born, and the living issue of any deceased child, per stirpes; that is, one-third ( 1/3 ) thereof to my wife absolutely (except one-third ( 1/3 ) of my common capital stock in R. J. Reynolds Tobacco Company which is subject to the terms of trust later herein created) and two-thirds ( 2/3 ) thereof to my children and the living issue of any deceased child, per stirpes, to be equally divided among them, share and share alike (the living issue of any deceased child to take such child's part) But Subject to the Following Trust, * * *.
There then follow certain specific provisions, of which the following is pertinent:
(7) Should any of my children die before he or she shall arrive at the age of twenty-eight (28) years, then the share of my estate which would have been payable to him or her, had he or she arrived at that age, shall be continued to be held by my said Trustees for the use and benefit of his or her devisees by Will until the time that such child would have arrived at the age of twenty-eight years, if he or she had lived, when the said trust shall cease and the estate shall then become payable to such devisees, the Trustees, however, paying in the meanwhile the income from said share to them; but should any of my children die before that time without having disposed of his or her share by Will but leaving issue him or her surviving, the share of said deceased child shall continue to be held by my said Trustee for the use and benefit of his or her children living at his or her death, paying unto them or applying so much of the net income of the share of my child so dieing as said Trustee may deem necessary for their support and maintenance and accumulating the balance until the time my child so dieing would have arrived at the age of twenty-eight years, if he or she had lived, when the trust shall cease and the estate shall then become vested in his or her children, then surviving; then, should any of my said children die without having made a testamentary disposition of his or her share of my said estate and without issue living at the termination of said trust, then his or her share shall be held on like trusts for my surviving children and the then living issue of my deceased children per stripes; and, should all of my children and their issue die before the termination of the trusts, then, in that event, one-half of the trust estate in value at that time, principal and income, shall go to and belong to my said wife, and the other half to my brothers and sisters then living and the descendants then living of any of my deceased brothers and sisters, per stripes.
2. Katharine Johnston's inter vivos trust. — Katharine Johnston, decedent's mother, on December 29, 1923, transferred to a trustee certain Reynolds Tobacco Co. stock, naming her four children, including decedent, as beneficiaries under the following conditions:
The Safe Deposit & Trust Company of Baltimore as Trustee hereunder shall hold the share of each child for such child during its life, and upon its death shall distribute, transfer and deliver the same to and among, or hold the same for such person or persons, objects or purposes, in trust and otherwise, as such child shall by its Last Will nominate and appoint to take the same, and in default of such appointment shall distribute, transfer and deliver the same to the descendants of such child living at its death, per stirpes and not per capita, and in default of such appointment and in default of descendants of such child the said Trustee shall at its death divide and distribute the same among such of said children and their descendants as are then living, per stirpes and not per capita, but the shares of such of her said children as are then living shall be held by said Trustee in trust for them and upon the same trusts that their original shares are then held.
3. Katharine Johnston's testamentary trust. — On March 29, 1924, Katharine Johnston executed her will leaving all the residue of her estate and all her interest in the R. J. Reynolds trust over which she had power of appointment to the Safe Deposit & Trust Co., in trust in equal shares for her children and husband, the income to be paid to the children as necessary until each should reach 28, and then the corpus, which was subjected to the following conditions:
My said Trustee shall hold the share of each child for such child during its life, and upon its death shall distribute, transfer and deliver the same to and among or hold the same for such person or persons, objects or purposes, in trust or otherwise, as such child shall by its Last Will nominate and appoint to take the same, and in default of such appointment shall distribute, transfer and deliver the same to the descendants of such child living at its death, per stirpes and not per capita, and in default of such appointment and in default of descendants of such child my said Trustee shall at its death divide and distribute the same among such of my husband, children and descendants as are then living, per stirpes and not per capita, my said husband, if then living, shall take a share equal to that of a surviving child, but the shares of such of my children as are then living shall be held by said Tru...
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