Sulovich's Estate v. C. I. R.

• Decision Date: 30 November 1978
• Docket Number: No. 76-2517,76-2517
• Citation: 587 F.2d 845
• Parties: 78-2 USTC P 13,270 ESTATE of Semo A. SULOVICH, Deceased, Helen Unkovich, Executrix, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 845

587 F.2d 845

78-2 USTC P 13,270 ESTATE of Semo A. SULOVICH, Deceased, Helen Unkovich Executrix, Petitioner-Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellant.

No. 76-2517.

United States Court of Appeals Sixth Circuit.

Argued Oct. 10, 1978.

Decided Nov. 30, 1978.

Myron C. Baum, Richard W. Perkins, Scott P. Crampton, Gilbert Andrews, Asst. Atty. Gen., Tax Division, U. S. Div. of Justice, Washington, D. C., Mary L. Jennings, Meade Whitaker, Chief Counsel, Internal Revenue Service, Washington, D. C., for respondent-appellant.

D. Alden Newland, Honolulu, Hawaii, for petitioner-appellee.

Before PHILLIPS, Chief Judge, and LIVELY and ENGEL, Circuit Judges.

PHILLIPS, Chief Judge.

The issue on this appeal is whether the decedent, at his death, possessed sufficient powers over certain savings accounts to require the sums in those accounts to be included in his gross estate under Sections 2036 and 2038 of the Internal Revenue Code. ¹ The decedent, Semo A. Sulovich, a Yugoslavian immigrant, was the co-owner and operator of a restaurant in downtown Dallas for approximately thirty years. At his death, most of Sulovich's assets were held in accounts at various Dallas banks. Some of those accounts he held jointly with his niece, Helen Unkovich. Certain other accounts were held by Sulovich as trustee for his niece and each of her four children. Mrs. Unkovich brought this action as Executrix after the Commissioner determined a deficiency in Federal estate taxes due from Sulovich's estate in the amount of $27,145.16. The deficiency resulted from the exclusion of the trustee accounts from the decedent's gross estate. Sulovich's gross estate was valued in excess of $190,000.00.

The United States Tax Court held that decedent had made a completed gift of the accounts and they were, therefore, not includible in the decedent's gross estate. 66 T.C. 250 (1976). The Commissioner appeals.

We reverse.

I

On March 2, 1959, the decedent opened five savings accounts at Dallas Federal Savings and Loan Association (Dallas Federal) in his name as trustee for his niece and each of her four children. In connection with the establishment of each of these accounts, decedent executed a signature card, which reserved in him the right, during his lifetime, to assign, transfer, sell or withdraw the funds in each account. The signature cards also authorized the bank to act without further inquiry in accordance with writings bearing decedent's signature. Each of the signature cards contained the following language:

It is expressly understood that Semo Sulovich shall have the exclusive right during his lifetime, to assign, transfer, and sell the Share Account to be issued under the application on the reverse side hereof, and to withdraw the repurchase value of the said share account. In the event of death or incapacity to act of Semo Sulovich then and in that event the beneficiary, whether a minor or an adult, shall have the right to withdraw the repurchase value of said account to be so issued.

On December 21, 1965, decedent wrote a letter to his niece ² in which he stated his intention that she use the money in the trust accounts for the needs of her family. Decedent further indicated that he was going to send the niece the five trust account passbooks after the first of the year. Thereafter, decedent sent the five account books to his niece. After his restaurant was robbed in 1967, decedent requested duplicate passbooks from the bank, mistakenly believing the originals were stolen in the robbery. He forwarded these duplicate passbooks to his niece.

Dallas Federal obtained the social security numbers of decedent's niece and her four children for the trust accounts. Annual statements from the bank indicating the interest attributable to each account were sent to the niece. She reported the interest attributable to the account held in trust for her on her Federal income tax return. ³ No withdrawals were made from the trust accounts during decedent's life. Except under rare circumstances, Dallas Federal would not permit withdrawals without a passbook.

The signature card contracts were in effect at decedent's death and he could have withdrawn the money from the accounts, as trustee, so long as he was in possession of the account passbooks. Furthermore, decedent had full control over the beneficiaries' access to the funds in the trust accounts by the terms of the signature cards, even though the decedent's niece was in possession of the passbooks. At all times it was necessary for decedent to authorize any withdrawal from the trust accounts and, without such permission, no funds could be paid to the beneficiaries.

II

The Commissioner contends that decedent retained sufficient power over the five savings accounts to require their inclusion in his gross estate under §§ 2036 and 2038. Section 2036(a)(2) ⁴ requires that the value of property transferred in trust be included in the settlor's gross estate where at the time of his death the settlor retains the discretionary right, either alone or in conjunction with another, to designate the person who will possess or enjoy the property. This power to designate includes the power to deny the trust beneficiaries the privilege of immediate enjoyment and to condition their enjoyment upon their surviving the termination of the trust. United States v. O'Malley, 383 U.S. 627, 86 S.Ct. 1123, 16 L.Ed.2d 145 (1966); Estate of O'Connor v. Commissioner of Internal Revenue,54 T.C. 969, 973 (1970). Section 2038(a)(1) ⁵ requires inclusion of the value of property transferred in trust in the settlor's gross estate where at the time of his death he retains the discretionary power to terminate the trust and distribute the proceeds to the beneficiaries. The settlor's power to terminate contingencies upon which the beneficiaries' rights to enjoyment of the trust depend has been considered a power to "alter, amend, revoke or terminate" within the meaning of § 2038(a)(1). Lober v. United States, 346 U.S. 355, 74 S.Ct. 98, 98 L.Ed. 15 (1953); Commissioner of Internal Revenue v. Estate of Holmes, 326 U.S. 480, 66 S.Ct. 257, 90 L.Ed. 228 (1946); Estate of O'Connor, supra. See Estate of Bischoff v. Commissioner of Internal Revenue, 69 T.C. 32, 46-47 (1977).

The Tax Court found the savings account trusts valid revocable trusts at their inception, citing Land v. Marshall, 426 S.W.2d 841 (Tex.1968); and Westerfield v. Huckaby, 462 S.W.2d 324 (Tex.Civ.App.1970), Aff'd, 474 S.W.2d 189 (Tex.1971). The court recognized that the signature card contracts between the decedent and Dallas Federal delineated decedent's control over the accounts and allowed him to deal with the accounts as his own property, which included making gifts of the accounts.

The Tax Court further held that when the decedent delivered the passbooks to his niece, he intended to make a present gift of the accounts to the trust beneficiaries. The court noted that to make a valid inter vivos gift of a savings account held by the depositor as trustee for another the donor must intend to transfer all dominion and control over the property to the donee and there must be some delivery of the property, citing O'Donnell v. Haladay, 152 S.W.2d 847 (Tex.Civ.App.1941); Fasano v. Meliso, 146 Conn. 496, 152 A.2d 512 (1959); Hickey v. Kahl, 129 N.J.Eq. 233, 19 A.2d 33 (1941). The court found strong evidence of decedent's intent by his demonstrated affection for his niece and her children, by the decedent's apparent intention never to disturb the funds in the trusts, by the fact that he never made any withdrawals from the trust accounts, and by decedent's letter to his niece in December 1965 followed by his delivery of the passbooks to her. The Tax Court concluded that since decedent made a completed gift, which necessarily requires the transferring of all dominion and control over the property to the donee, decedent retained no power over the accounts which would require them to be included in his gross estate for Federal estate tax purposes.

III

The ultimate finding of fact by the Tax Court that the decedent did not possess dominion and control over the savings accounts at the time of his death, within the contemplation of §§ 2036 and 2038, because he had made completed inter vivos gifts thereof we conclude to be clearly erroneous under the record in this case. See Commissioner of Internal Revenue v. Duberstein, 363 U.S. 278, 80 S.Ct. 1190, 4 L.Ed.2d 1218 (1960). The conclusion of the Tax Court is contradicted not only by the express language of the signature cards, but also by the testimony of the officer of Dallas Federal, who advised decedent in the establishment of the trust accounts. William C. H. Jackson, retired Secretary and Treasurer of Dallas Federal, who had known decedent ever since he opened his first account with Dallas Federal in 1948, testified that under the practice of the Association with respect to the restrictions contained in the language of the signature cards, a beneficiary could have withdrawn funds from the accounts only on the authority of Sulovich. Mr. Jackson said: "(H)e would have to withdraw it, but he would have to endorse it . . . as Trustee." This witness further testified that the beneficiaries could have withdrawn funds from the accounts before the death of Sulovich ". . . only through him. If they were ready to go to college and He wanted them to have it, he could withdraw it as Trustee . . ." (Emphasis added.)

The record discloses an expressed intention on the part of the decedent that the funds in the accounts be used only for the education and necessities of the beneficiaries. By the exercise of frugality the decedent had built up a substantial estate. The Dallas Federal officer described Sulovich as "tight" and "conservative." It is inconceivable, on the record before us, that Sulovich would have permitted any withdrawals by any beneficiary for any purpose which he considered to be extravagant or...