Tracy-Collins Trust Co. v. Comm'r of Internal Revenue (In re Estate of Sweet), Docket No. 46406.

• Decision Date: 24 June 1955
• Docket Number: Docket No. 46406.
• Citation: 24 T.C. 488
• Parties: ESTATE OF ARTHUR SWEET, DECEASED, TRACY-COLLINS TRUST COMPANY, ADMINISTRATOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

24 T.C. 488

ESTATE OF ARTHUR SWEET, DECEASED, TRACY-COLLINS TRUST COMPANY, ADMINISTRATOR, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 46406.

Tax Court of the United States.

Filed June 24, 1955.

Maurice J. Hindin, Esq., for the petitioner.

Leonard A. Marcussen, Esq., for the respondent.

In June 1947, the decedent conveyed property to a revocable trust. Under the trust agreement, the trust income was to be paid to the decedent for life and then to his wife for her life. At their deaths, the trust was to terminate and the principal was to be distributed to the decedent's children. In July 1948, the decedent amended the trust agreement to give his wife a power of appointment ‘over such portion of the Trust Estate as equals one-half (1/2) of the value of my adjusted gross estate, as appraised for Federal Estate Tax purposes.’ Held: (1) A decision entered by the District Court of Utah construing the instruments as creating two trusts amounted to a consent decree and it is not controlling. (2) The trust instruments executed by the decedent created only one trust. (3) The power of appointment in the decedent's wife did not extend to the ‘entire corpus' of the trust, and, therefore, no part of the trust assets qualifies for the marital deduction under section 812(e)(1)(A) of the 1939 Code.

The Commissioner determined a deficiency in estate tax of $35,565.27. Part of the deficiency is conceded. The amount of the deficiency which is contested by the petitioner is $16,556.45. The question to be decided is whether two separate trusts were created by an amended trust agreement executed by the decedent during his lifetime. The petitioner asserts that the agreement created two trusts, and claims the marital deduction provided for in section 812(e)(1) of the Internal Revenue Code of 1939 with respect to the one over which the decedent's wife, who survived him, had a power of appointment. The respondent disallowed the deduction because he determined that only one trust was created by the agreement, and that the surviving wife's power of appointment did not extend to the entire corpus of such trust.

FINDINGS OF FACT.

The facts which have been stipulated are found accordingly.

Arthur Sweet, hereinafter referred to as the decedent, died on September 29, 1948. He was survived by his wife, Margaret M. Sweet, and by four children. The Tracy-Collins Trust Company of Salt Lake City, Utah, is the administrator c.t.a. of the decedent's estate. The decedent was a resident of Salt Lake City at the time of his death and for a long period prior thereto. The estate tax return was filed with the collector of internal revenue for Utah.

In June 6, 1947, the decedent, as trustor, and the Tracy-Collins Trust Company, as trustee, executed a trust agreement whereby the decedent established a revocable trust. The decedent conveyed 650 shares of common stock of the Sweet Candy Company, a Utah corporation, to the trustee for the uses and purposes of the trust. Thereafter, he conveyed additional securities and his right to a money deposit, to the trustee. Under the trust agreement, the decedent reserved the right to receive the trust income during his life, to withdraw part or parts of the trust income during his life, to withdraw part or parts of the trust principal, and to alter, amend, or revoke the trust. Paragraph III of the instrument provided as follows:

(1) Upon the death of the TRUSTOR, the TRUSTEE shall pay from the principal of the Trust Estate, any and all income, estate and transfer taxes levied upon or assessed against the property constituting the Trust Estate, and the income therefrom.

(2) Upon the death of the TRUSTOR, and after the payment of the items enumerated in paragraph (1) above, the TRUSTEE shall pay the net income from the Trust Estate annually unto MARGARET M. SWEET, wife of the TRUSTOR, during her lifetime.

Paragraph IV of the instrument provided that after the death of the decedent and his wife, the trust was to terminate and the principal and any accumulated and undistributed income were to be distributed, in equal shares, to the decedent's four children.

The trust agreement was drawn up by Samuel J. Carter, who was then engaged in the practice of law. In July 1947, shortly after the execution of the agreement, Carter became a vice president of the Tracy-Collins Trust Company and head of its trust department. On July 13, 1948, Carter wrote to the decedent as follows:

By amending your trust to give Mrs. Sweet the power to appoint final distribution upon her death, after your death, over one-half of your trust estate, your estate would save a very substantial amount in taxes in the event of your death. For instance if your estate should be appraised upon your death at $200,000.00, the tax thereon would amount to approximately $31,500.00. If, however, Mrs. Sweet is given the power of appointment over one-half of your estate, the tax on your entire estate would amount to about $4,800.00. This savings is made possible by the Revenue Act of 1948, which became effective in April of this year. I suggest that you discuss this matter with Mr. Hindin, and if you conclude that an amendment should be made to the agreement, we will prepare one upon your requesting us to do so.

The decedent desired to take advantage of the tax benefits referred to in Carter's letter and requested Carter to prepare an appropriate amendment to the trust agreement of June 6, 1947. On July 27, 1948, the decedent and the Tracy-Collins Trust Company executed ‘Supplemental Trust Agreement’ which Carter had prepared. This supplemental agreement canceled paragraph IV of the original agreement, which pertained to the distribution of corpus after the deaths of the decedent and his wife, and substituted the following:

IV.

(1) MARGARET M. SWEET, wife of the TRUSTOR, shall have the power of appointment over such portion of the Trust Estate as equals one-half (1/2) of the value of my adjusted gross estate, as appraised for Federal Estate Tax purposes. The power of appointment of the said MARGARET M. SWEET shall be exercisable in favor of herself, or in favor of her estate, or in favor of any other person, whom she shall elect to appoint. The power may be exercised by Will, or in the alternative, by written instrument other than a Will. It may be exercised from time to time and each appointment may be revoked or modified. In the absence of an appointment completely disposing of said portion of the Trust Estate, upon the death of the said MARGARET M. SWEET, said portion of the Trust Estate shall terminate and the TRUSTEE shall pay, disburse and distribute the same, in equal shares, unto the daughter of the TRUSTOR, DOROTHY SWEET HINDIN, the daughter of the TRUSTOR. BARBARA SWEET HARTMAN, the daughter of the TRUSTOR, MARGARET ‘PEGGY’ SWEET, and the son of the TRUSTOR, ARTHUR DAVID SWEET.

(2) The remainder of the Trust Estate, over which the said MARGARET M. SWEET has no power of appointment, shall terminate upon the death of the last survivor of the TRUSTOR, and said MARGARET M. SWEET, and the TRUSTEE shall pay, disburse and distribute the same, in equal shares, unto the daughter of the TRUSTOR, DOROTHY SWEET HINDIN, the daughter of the TRUSTOR, BARBARA SWEET HARTMAN, the daughter of the TRUSTOR, MARGARET ‘PEGGY’ SWEET, and the son of the TRUSTOR, ARTHUR DAVID SWEET.

(3) Should any of the said children of TRUSTOR, namely, DOROTHY SWEET HINDIN, BARBARA SWEET HARTMAN, MARGARET ‘PEGGY’ SWEET and ARTHUR DAVID SWEET, predecease the TRUSTOR, or die during the operation of the Trust Estate, then, in either of said events, the share of the Trust Estate to which such deceased child would be entitled, if living, shall be paid and distributed, in equal shares to the then living child or children of such deceased child.

(4) Should any of the said children of the TRUSTOR, namely, DOROTHY SWEET HINDIN, BARBARA SWEET HARTMAN, MARGARET ‘PEGGY’ SWEET and ARTHUR DAVID SWEET, predecease the TRUSTOR, or die during the operation of the Trust Estate, and leave no child or children surviving, then in either of said events, the share of the Trust Estate to which such deceased child would be entitled, if living, shall be paid and distributed, in equal shares, unto the then living brother or sisters of such deceased child.

The supplemental agreement ratified and confirmed the original agreement in all other respects. The final paragraph of the original agreement and of the supplemental agreement reads as follows:

IN WITNESS WHEREOF, the said ARTHUR SWEET has hereunto set his hand, and TRACY-COLLINS TRUST COMPANY, of Salt Lake City, Utah, in acceptance of these trusts, has caused these presents to be executed by its Vice-President, and its corporate seal to be hereunto affixed, duly attested by its Secretary, on the day and year first above written.

In administering the trust agreements, the trustee established and maintained records for only one trust, and filed only one fiduciary return for the trust in each of the years 1948 to 1951, inclusive.

On October 1, 1948, two days after the decedent's death, undistributed trust income in the amount of $7,943.16 was transferred by the trustee from the income cash account to the principal cash account and became part of the trust principal. Thereafter, the entire trust income, after deduction for trustee's fees and other charges, was received and held by the trust for distribution to the decedent's spouse and was disbursed to her from time to time upon her request. The first of these distributions was in the amount of $2,000 and occurred on February 14, 1950. On May 13, 1950, the Utah State inheritance taxes in the amount of $14,244.72 were paid with funds in the hands of the trustee. This disbursement was erroneously charged to the income account, contrary to the provisions of paragraph III of the trust agreement; however, this error was corrected on January 20, 1951, by a transfer of the same amount...