Scherick v. Comm'r of Internal Revenue (In re Estate of Showers)
| Decision Date | 23 May 1950 |
| Docket Number | Docket No. 22098. |
| Citation | 14 T.C. 902 |
| Parties | ESTATE OF E. A. SHOWERS, DECEASED, ELIZABETH McEACHERN SCHERICK, THOMAS ELMORE McEACHERN AND CHESTER WILLIAM SHOWERS, INDEPENDENT EXECUTORS, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. Petitioners' decedent in 1938 irrevocably assigned four insurance policies on his life to his wife. At the end of 1942 he transferred by gift to his wife his community one-half interest in certain oil leases. Until 1943 decedent paid the premiums on the policies. From 1943 to his death in 1946, premiums on such policies were paid with income derived from the property transferred by him to his wife. Held, premiums paid in 1943 and thereafter were indirectly paid by decedent and the amount received on such policies at death attributable to such premiums is includible in decedent's gross estate under section 811(g)(2), I.R.C., section 404(a), 1942 Act.
2. Decedent and wife, domiciled in Texas, executed in 1937 and 1938 five trust agreements for the benefit of their daughters, under the terms of each of which decedent had the power at any time to terminate the trust and deliver the trust estate to the beneficiary or beneficiaries then entitled thereto. From 1937 to 1942, inclusive, they transferred as gifts certain community property to such trusts. Decedent dies on October 22, 1946. Held:
(1) Transfers by decedent and wife to the trusts of community property were in substance and effect transfers by decedent, the husband under Texas law having exclusive power of control and disposition of community property, absent fraud against the rights of the wife. Furthermore, under section 811(d)(5) of the code, such transfers must be considered as having been made by decedent.
(2) Value at death of five trust estates, including not only value of decedent's one-half interest in community property originally transferred, as conceded by petitioners, but also value of the wife's one-half interest in community property originally transferred, and also value of properties acquired with trust income, are includible in decedent's gross estate, since decedent's power to terminate extended to entire trust estates and death of decedent completed inter vivos transfers.
(3) Settling of gift tax liability for 1937 of decedent's wife by closing agreement does not preclude the inclusion in decedent's gross estate of the value at his death of wife's one-half interest in community property originally transferred to trusts.
(4) Section 811(d)(5) of the code does not violate the due process clause of the Fifth Amendment to the Constitution of the United States.
The Commissioner determined a deficiency in estate tax in the amount of $655,653.30. The questions to be determined are whether the Commissioner erred in including in the value of the decedent's gross estate (1) an additional amount of $30,833.34 as insurance, and (2) the value of the properties of five trust estates in the aggregate amount of $1,014,628.56.
George E. B. Peddy, Esq., for the petitioners.
A. T. Akin, Esq., and Joseph P. Crowe, Esq., for the respondent.
It is agreed by the parties that credits allowable for gift taxes and estate and inheritance taxes shall be adjusted upon recomputation under Rule 50.
The case was submitted on a stipulation of facts and exhibits attached thereto. The stipulated facts are so found.
The petitioners are independent executors of the estate of E. A. Showers, deceased (hereinafter referred to as decedent), who died testate on October 22, 1946, in Harris County, Texas.
At the time of his death all property owned by decedent, except certain real estate in Hidalgo County, Texas, was community property of the decedent and his surviving wife, Mary Elizabeth Showers (now Mrs. Elizabeth McEachern Scherick).
Three children were born to decedent and his wife, namely, Ann Showers, born July 24, 1928; Betty Showers, born November 10, 1930; and Nancy Showers, born December 28, 1936. The three children survive the decedent.
The estate tax return, filed with the collector for the first district of Texas, at Austin, Texas, on or about December 19, 1947, reflected a net estate of $2,003,929.53 for basic tax, a net estate of $2,043,929.53 for the additional tax; and total estate tax payable of $667,611.11, check for which accompanied the return.
On or before February 18, 1938, four insurance policies, numbered 347986, 347985, 179100, and 286585, on the life of the decedent in the aggregate amount of $105,250, were irrevocably assigned and made payable to the beneficiary, Mary Elizabeth Showers, wife of decedent.
On December 23, 1942, decedent transferred by gift to his wife, Mary Elizabeth Showers, his one-half community interest in certain interests in certain oil and gas leases which were a part of the community property of decedent and his wife. On a gift tax return filed for the year 1942, decedent reported a value of $20,550 for this gift. The income from the properties conveyed to his wife by decedent was deposited in a separate account in the National Bank of Commerce, Houston, Texas. The total of such income sp deposited from January 1, 1943, through December 31, 1946, was $51,248.65. From January 1, 1943, through December 31, 1946, there was expended from such account, for operating expense, general expense, and ad volorem taxes on leases, the amount of $11,308.15; a gift to the daughters of decedent and his wife of $2,250 in each of the years 1943, 1944, and 1945, or a total of $6,750; the amount of $16,915.60 for the purchase in April and May, 1946, of certain shares of stock; and the aggregate amount of $8,647.60 for premiums paid in 1943 to 1946, inclusive, on the four insurance policies assigned by decedent to his wife. All the checks drawn on this account for the payment of such premiums were signed by the decedent under the printed name, ‘Mary Elizabeth Showers.‘
Prior to January 10, 1941, the decedent paid premiums on the four insurance policies in the total amount of $17,168.80, and subsequent to January 10, 1941, he paid premiums thereon in the total amount of $4,301.20.
Upon audit of the estate tax return, the Commissioner increased the value of insurance reported and included in the value of the gross estate, with explanation stated in the notice of deficiency as follows:
+---------------------------------------------------------+
¦Schedule D of return ¦Returned ¦Determined¦
+------------------------------------+---------+----------¦
¦ ¦ ¦ ¦
+------------------------------------+---------+----------¦
¦Item 1, Policy No. 347986 ¦$4,208.33¦$12 625 ¦
+------------------------------------+---------+----------¦
¦Item 2, Policy No. 347985 ¦8,333.33 ¦25,000 ¦
+------------------------------------+---------+----------¦
¦Item 3, Policy No. 179100 ¦2,500.00 ¦7,500 ¦
+------------------------------------+---------+----------¦
¦Item 4, Policy No. 286585 ¦500.00 ¦1,250 ¦
+------------------------------------+---------+----------¦
¦Added item, Policy No. K-100204 U. S¦ ¦10,000 ¦
+------------------------------------+---------+----------¦
¦ ¦ ¦ ¦
+---------------------------------------------------------+
Items 1 to 4, inclusive, have been determined understated as returned, which returned amounts have been increased on account of premiums paid by decedent, either directly or indirectly, after January 10, 1941.
It is held that the added item shown above representing a U.S. Government policy is taxable in the full amount of its $10,000.00, face value.
The ‘Added item‘ of $10,000 is not in controversy.
On April 1, 1939, the decedent and his wife created a trust, designated as the ‘E. a. Showers Trust,‘ for the benefit of their daughters Ann and Betty Showers, by the execution of a trust instrument conveying to the decedent, as trustee, certain royalty and mineral interests therein described and cash in the amount of $688.44, all of which property so conveyed was community property of the decedent and his wife. The decedent, as trustee, was given ‘full, complete and unrestricted power‘ of sale or other disposition of the trust estate and investment of the proceeds thereof or of the income of the trust estate, together with the right, power, and authority to handle, control, and manage the trust estate in any manner he might see fit, limited only by the right of the beneficiaries, upon making proof that the estate was being wasted or dissipated by the trustee in any court having jurisdiction thereof, to have a receiver of the trust estate appointed by such court. The income of the trust was to be accumulated and become a part of the corpus.
The trust instrument provided that, if and when each child married or reached the age of 21 years, the trustee was to pay her $500 a month out of the income of the trust, and $20,000 out of the corpus to be used only for the purchase of a home. The trust was to continue until the youngest child reached the age of 35 years, or the survivor attained the age of 35 years, or both daughters died. If both of the daughters were living when the youngest reached the age of 35 years, the trust estate was to be divided between them, share and share alike. If either child died without issue, the whole of the trust estate was to be delivered to the survivor. If either child died leaving issue, the share to which the deceased child was entitled was to be delivered to her surviving issue. If both daughters dies without issue, the trust estate was to vest in their heirs under the law of descent and distribution of the State of Texas. The trust instrument further provided, in part, as follows:
VII.
Said E. A. Showers, Trustee, shall have the right at any time to terminate the trust estate and deliver the trust...
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