Fahnestock v. Commissioner

*1097 The Commissioner has determined a deficiency in estate tax of $ 334,797.37 against the estate of Harris Fahnestock. The deficiency results from the following adjustments made by the Commissioner to the net estate as reported on the estate tax return filed*195 by the executors:

The petitioners assign several errors contesting the correctness of the foregoing adjustments and alleging that the Commissioner not only erred in determining a deficiency in estate tax, but that he should have determined that petitioners are entitled to a refund of Federal estate tax in the amount of $ 51,773.44.

A stipulation has been filed in which all issues between petitioners and the Commissioner have been settled except one. Effect will be given to this agreement of settlement in a recomputation under Rule 50. The issue which has not been settled and has been submitted to us for decision concerns the addition to the net estate, as reported by petitioners, of "transfers, $ 323,282.99." This adjustment is explained in the deficiency*196 notice as follows:

The values of the remainders after the life interests of the primary beneficiaries in the above-mentioned trusts created by decedent by instruments of *1098 date June 23, 1926, November 24, 1926 and July 8, 1927, are included in the gross estate as transfers intended to take effect in possession or enjoyment at or after the decedent's death, in accordance with the provisions of Section 811 (c) of the Internal Revenue Code.

Petitioners by an appropriate assignment of error contest the correctness of the foregoing adjustment.

FINDINGS OF FACT.

Most of the facts have been stipulated and we adopt this stipulation as part of these findings.

Petitioners are the duly qualified and acting executors of the last will and testament of Harris Fahnestock, deceased, who died October 11, 1939, a resident of the City of New York. The Federal estate tax return for the estate of said decedent was filed with the collector of internal revenue for the third district of New York on January 10, 1941.

By agreement dated June 23, 1926, between decedent and Central Hanover Bank & Trust Co., as trustee, decedent created a trust for the benefit of his son, Harris Fahnestock, Jr., and*197 remaindermen. In so far as is here pertinent, this agreement and the amendment thereto dated April 30, 1927, provided that the income from the trust thereby created was to be paid to Harris Fahnestock, Jr., during his lifetime and upon his death the principal thereof was to be paid to the issue of the marriage between Harris Fahnestock, Jr., and Alice Muriel Post Fahnestock or, in default of issue of such marriage then living, to Ruth Fahnestock and Faith Fahnestock, sisters of Harris Fahnestock, Jr., the issue of either of them who might not be then living to take the share which their ancestor would have taken had she survived, or, if neither Ruth Fahnestock nor Faith Fahnestock nor any issue of them were then living, to decedent or his legal representatives.

By agreement dated November 24, 1926, between decedent and Central Hanover Bank & Trust Co., as trustee, decedent created a trust for the benefit of his daughter, Ruth Fahnestock, and remaindermen. In so far as is here pertinent, this agreement provided that the income from the trust thereby created was to be paid to Ruth Fahnestock during her lifetime and upon her death the principal thereof was to be paid to the issue of*198 the marriage between Ruth Fahnestock and Alfred Coster Schermerhorn, or, in default of issue of such marriage then living, to Harris Fahnestock, Jr., and Faith Fahnestock, the issue of either of them who might not be then living to take the share which their ancestor would have taken had he or she survived or, if neither Harris Fahnestock, Jr., nor Faith Fahnestock nor any issue of them were then living, to decedent or his legal representatives.

*1099 By agreement dated July 8, 1927, between decedent and Central Hanover Bank & Trust Co., as trustee, decedent created a trust for the benefit of his son, Harris Fahnestock, Jr., and remaindermen. This agreement provided that the income from the trust thereby created was to be paid to Harris Fahnestock, Jr., during his lifetime and upon his death the principal thereof was to be paid to the issue of Harris Fahnestock, Jr., or, in default of such issue then living, to the sisters of Harris Fahnestock, Jr., the issue of either of them who might then be deceased to take the same share their ancestor would have taken had she survived, or, if no sister or issue of any deceased sister should survive Harris Fahnestock, Jr., to the decedent, *199 or, if he be not then living, to his personal representatives, to be by them distributed to decedent's next of kin who should survive Harris Fahnestock, Jr.

By agreement dated July 8, 1927, between decedent and Central Hanover Bank & Trust Co., as trustee, decedent created a trust for the benefit of his daughter, Ruth Fahnestock, and remaindermen. This agreement provided that the income from the trust thereby created was to be paid to Ruth Fahnestock during her lifetime and upon her death the principal thereof was to be paid to the issue of Ruth Fahnestock, or, in default of such issue then living, to the brother and sister of Ruth Fahnestock, the issue of either of them who might then be deceased to take the same share their ancestor would have taken had he or she survived, or, if no brother or sister or issue of any deceased brother or sister should survive Ruth Fahnestock, to the decedent, or, if he be not then living, to his personal representatives, to be by them distributed to decedent's next of kin who should survive Ruth Fahnestock.

By agreement dated July 8, 1927, between decedent and Central Hanover Bank & Trust Co., as trustee, decedent created a trust for the benefit *200 of his daughter, Faith Fahnestock, and remaindermen. This agreement provided that the income from the trust thereby created was to be paid to Faith Fahnestock during her lifetime and upon her death the principal thereof was to be paid to the issue of Faith Fahnestock, or, in default of such issue then living, to the brother and sister of Faith Fahnestock, the issue of either of them who might then be deceased to take the same share their ancestor would have taken had he or she survived, or, if no brother or sister or issue of any deceased brother or sister should survive Faith Fahnestock, to the decedent, or, if he be not then living, to his personal representatives, to be by them distributed to decedent's next of kin who should survive Faith Fahnestock.

Decedent was born on September 21, 1869. The children and grandchildren *1100 of decedent who survived him, with their dates of birth, are as follows:

*201 Harris Fahnestock, Jr., was married on May 1, 1939, to Frances Jeffery, who is still living, and a daughter, Joan Whedon Fahnestock, was born to them on January 9, 1944.

Immediately prior to the death of decedent the value of his reversionary interest in the trust created for the benefit of Harris Fahnestock, Jr., by agreement dated June 23, 1926, between decedent and Central Hanover Bank & Trust Co., as trustee, was $ 0.000,000,29513 per $ 1 of principal, or 29.513 cents per $ 1,000,000 of principal, or, taking into consideration the value of the principal of said trust on the date of decedent's death as stipulated, the value of such reversionary interest was $ .033464.

Immediately prior to the death of decedent the value of his reversionary interest in the trust created for the benefit of Ruth Fahnestock by agreement dated November 24, 1926, between decedent and Central Hanover Bank & Trust Co., as trustee, was $ 0.000,000,28148 per $ 1 of principal, or 28.148 cents per $ 1,000,000 of principal, or, taking into consideration the value of the principal of said trust on the date of decedent's death as stipulated, the value of such reversionary interest was $ .027659.

Immediately *202 prior to the death of decedent the value of his reversionary interest in the trust created for the benefit of Harris Fahnestock, Jr., by agreement dated July 8, 1927, between decedent and Central Hanover Bank & Trust Co., as trustee, was $ 0.000,000,29513 per $ 1 of principal, or 29.513 cents per $ 1,000,000 of principal, or, taking into consideration the value of the principal of said trust on the date of decedent's death as stipulated, the value of such reversionary interest was $ .085585.

Immediately prior to the death of decedent the value of his reversionary interest in the trust created for the benefit of Ruth Fahnestock by agreement dated July 8, 1927, between decedent and Central Hanover Bank & Trust Co., as trustee, was $ 0.000,000,28148 per $ 1 of principal, or 28.148 cents per $ 1,000,000 of principal, or, taking into consideration the value of the principal of said trust on the date of decedent's death as stipulated, the value of such reversionary interest was $ .080607.

*1101 Immediately prior to the death of decedent the value of his reversionary interest in the trust created for the benefit of Faith Fahnestock by agreement dated July 8, 1927, between decedent and*203 Central Hanover Bank & Trust Co., as trustee, was $ 0.000,000,27017 per $ 1 of principal, or 27.017 cents per $ 1,000,000 of principal, or, taking into consideration the value of the principal of said trust on the date of decedent's death as stipulated, the value of such reversionary interest was $ .078523.

None of the transfers included in the foregoing described trust indentures were intended to take effect in possession or enjoyment at or after decedent's death, but, on the contrary, the interests were unaffected by his death.

OPINION.

The Commissioner in his determination of the deficiency in estate tax against the estate of Harris Fahnestock, deceased, made several adjustments to the estate tax return filed by the executors. The only one of these adjustments now in issue is the one whereby the Commissioner added to the net estate as reported in the return $ 323,282.99 as "transfers." This latter amount represented the values of the remainders after the life interests of the primary beneficiaries had been deducted in the five trusts created by decedent by instruments of June 23, 1926, November 24, 1926, and July 8, 1927. The Commissioner stated in his deficiency notice that *204 the reason that he included the values of these remainder interests in decedent's estate was because they were transfers "intended to take effect in possession or enjoyment at or after the decedent's death" in accordance with the provisions of section 811 (c) of the Internal Revenue Code, printed in the margin. ¹ The Commissioner still insists on the correctness of this view.

*205 The substance of petitioners' contention is that the five trusts created by decedent during his lifetime were not intended by the grantor to take effect "in possession or enjoyment" at or after his death, which has since occurred at the age of 70, but, on the contrary, were intended to take effect in "possession or enjoyment" immediately upon the execution of the trust agreements. To that end the trusts were so limited as *1102 to make it impossible that they should revert to the grantor except on the occurrence of the single remote possibility that no issue of the grantor should survive him. We think petitioners must be sustained on the authority of such cases as Frances Biddle Trust, 3 T. C. 832, now on review, C. C. A., 3d Cir., and Lloyd v. Commissioner, 141 Fed. (2d) 758.

The issue which we have here to decide involves the construction of the language of five separate trust indentures. However, the language of each of them is substantially the same in so far as it involves the issue we have here to decide. Therefore, in our discussion we shall have in mind the language of the trust agreement created for*206 Harris Fahnestock, Jr., on June 23, 1926, as the life beneficiary with remainders over as named in the trust indenture. It is the argument of the Commissioner that the language used in these trust agreements brings them within the classification of "transfers to take effect in possession or enjoyment at or after decedent's death." In support of his argument the Commissioner relies upon such cases as Klein v. United States, 283 U.S. 231; Helvering v. Hallock, 309 U.S. 106; Fidelity-Philadelphia Trust Co. v. Rothensies, 142 Fed. (2d) 838; affd., 324 U.S. 108; and Estate of William Walker, 4 T. C. 390.

The Hallock case is a classic example of a transfer conditioned on survivorship. In that case the facts as to the transfer in question were briefly these: The decedent in 1919 created a trust under a separation agreement, giving the income to his wife for life, with the further provision:

If and when Anne Lamson Hallock shall die, then and in such event and thereupon the within trust shall terminate and said Trustee shall*207 * * * pay Party of the First Part [Hallock, the grantor] if he then be living any accrued income, then remaining in said trust fund and shall * * * deliver forthwith to Party of the First Part the principal of the said trust fund. If and in the event said Party of the First Part shall not be living then and in such event payment and delivery over shall be made to Levitt Hallock and Helen Hallock, respectively, son and daughter of the Party of the First Part, share and share alike * * * [Italics supplied.]

When the settlor died in 1932 the life beneficiary survived him. It seems clear that upon Hallock's death in 1932 not only was his possibility of reverter put to an end, but also for the first time it became certain that his two children would become the remaindermen of the corpus of the trust after the falling in of the life estate. It took his death to make certain that fact. In the Hallock case the Supreme Court reiterated the rule of the Klein case. The Court quoted from the Klein case as follows:

* * * It is perfectly plain that the death of the grantor was the indispensable and intended event which brought the larger estate into being for the grantee *208 and effected its transmission from the dead to the living, thus satisfying the terms of the taxing act and justifying the tax imposed.

*1103 The Court, after quoting the foregoing language from the Klein case, went on to say:

The inescapable rationale of this decision, rendered by a unanimous Court, was that the statute taxes not merely those interests which are deemed to pass at death according to refined technicalities of the law of property. It also taxes inter vivos transfers that are too much akin to testamentary dispositions not to be subjected to the same excise. By bringing into the gross estate at his death that which the settlor gave contingently upon it, this Court fastened on the vital factor. It refused to subordinate the plain purposes of a modern fiscal measure to the wholly unrelated origins of the recondite learning of ancient property law. Surely the Klein decision was not intended to encourage the belief that a change merely in the phrasing of a grant would serve to create a judicially cognizable difference in the scope of § 302 (c), although the grantor retained in himself the possibility of regaining the transferred property upon precisely*209 the same contingency. The teaching of the Klein case is exactly the opposite. [Italics supplied.]

As we view it, the language of the trust indentures involved in this proceeding does not bring them within the ambit of the Klein and Hallock cases.

For further discussion of the meaning of the Hallock and Klein cases, see Lloyd v. Commissioner, supra, and Fifth Avenue Bank of New York v. Commissioner, 59 Fed. Supp. 753. There is nothing in the language of the trust agreements to indicate that decedent intended to make gifts testamentary in character and intended to "take effect in possession or enjoyment at or after his death." The gifts inter vivos made in these trust agreements to the life tenants and remaindermen were in no way conditioned upon their surviving the grantor of the trusts.

The remainder interests which were conveyed, for example, in the trust indenture for Harris Fahnestock, Jr., were as follows: Upon the death of Harris Fahnestock, Jr., (the life tenant) the principal thereof was to be paid to the issue of the marriage between Harris Fahnestock, Jr., and Alice Muriel Post, *210 or, in default of issue of such marriage then living, to Ruth Fahnestock and Faith Fahnestock, the issue of either of them who might not be then living to take the share which their ancestor would have taken had she survived, or, if neither Ruth Fahnestock nor Faith Fahnestock, nor any issue of them, were then living, to decedent or his legal representatives.

Undoubtedly, when decedent died October 11, 1939, there came to an end a very remote possibility that the estate might revert to him. But, so far as we can see, the interests of the remaindermen were not enlarged or augmented to the slightest degree by reason of his death. The inter vivos gifts which were made to them were not in any way made contingent upon the death of the decedent, as was the case in the Klein and Hallock cases, and decedent's death added nothing to their ownership.

So far as we can see, the provisions of the trust agreements in the *1104 instant case fall within the same category as the provisions of the trust agreement in the Frances Biddle Trust case, supra. Our decision for the taxpayer in that case was based upon our holding that, while decedent's death ended a very remote *211 possibility of reverter, it did not enlarge or augment the estates of the remaindermen. We said: "The test is whether the death was the intended event which brought the larger estate into being for the grantee * * *." We must follow the Frances Biddle Trust case unless it has been in effect overruled by the Supreme Court's recent decision in the case of Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U.S. 108.

The Commissioner in his brief strongly relies on the Fidelity-Philadelphia Trust Co. case as decided by the Third Circuit, which has now been affirmed by the Supreme Court. Briefs in the instant case had been filed prior to the Supreme Court's decision. We think the facts of the instant case are clearly distinguishable from those present in the Fidelity-Philadelphia Trust Co. case. The latter case was a survivorship case. At least it was so construed by both the Third Circuit and the Supreme Court, and that fact, as we view it, constituted the basis of both decisions. The Supreme Court, after briefly stating the facts in that case, among other things, said:

* * * The ultimate disposition of all the trust property was suspended*212 during the life of the decedent. Only at or after her death was it certain whether the property would be distributed under the power of appointment or as provided in the trust instrument. The life estates of the daughters were contingent upon their surviving their mother and took effect in enjoyment only at the death of the latter. The remainder interests of the descendants of the daughters were contingent upon their surviving both the decedent and the daughters and took effect in possession only after the death of the decedent. Thus until the moment of her death or until an undetermined time thereafter the decedent held a string or contingent power of appointment over the total corpus of the trust. The retention of such a string, which might have resulted in altering completely the plan contemplated by the trust instrument for the transmission of decedent's property, subjected the value of the entire corpus to estate tax liability. [Italics supplied.]

In the instant case the decedent reserved no power of appointment, contingent or otherwise. He held no such string over the corpus at the time of his death. The feature which distinguishes the instant case from*213 the Fidelity-Philadelphia Trust Co. case is that in the case at bar the estates created by the trust indentures vested and became distributable independently of the death of the grantor. If the grantor had died on the next day after the creation of the trusts, this event would not have changed or affected in any way the devolution of the trust estates. He retained no string which, to use the language of the Supreme Court in the Fidelity-Philadelphia Trust Co. case, "might have resulted in altering completely the plan contemplated by the trust instrument for the transmission of decedent's property."

*1105 While there may be some language used by the Supreme Court in the Fidelity-Philadelphia Trust Co. case which, if read free from its context, might lend some support to the argument which the Commissioner makes in the instant case, we think the opinion of the Court must be read in the light of its context. As said by the Second Circuit in the recent case of Commissioner v. Irving Trust Co., 147 Fed. (2d) 946, in discussing the Supreme Court's decision in the Fidelity-Philadelphia Trust Co. case:

* * * But in that case the suspense*214 was occasioned by the reservation of a power of appointment in the grantor. The language quoted must be read in that light. Here the grantor retained no power and reserved no enforcible right. To treat the remainders as a part of his estate because of such language would be to include remainders to persons other than the grantor, which might take effect in the event of his death, even though he retained no control over them and no enforcible right of enjoyment or possession. * * * [Italics supplied.]

As we have already stated, the death of the decedent in 1939 ended his very remote possibility of a reverter, but we are unable to see where it had any greater effect than that. Therefore, we do not think there is any warrant for including under section 811 (c) of the code, as a part of decedent's estate, the value of the corpora of the five trusts in question at the date of decedent's death.

At the hearing of the instant case, which was prior to the Supreme Court's recent decision in the Fidelity-Philadelphia Trust Co. case, testimony of a qualified actuary was introduced giving his actuarial computations of the value of decedent's reversionary interests in the several trust*215 estates immediately prior to his death. We have embodied the substance of these actuarial computations in our findings of fact. However, such valuations, in our view, are now rendered immaterial under the Supreme Court's decision in the Fidelity-Philadelphia Trust Co. case. If any value is to be included in decedent's estate under section 811 (c), it would be the value determined by the Commissioner and not the actuarial computation of the value of decedent's reversionary interests immediately prior to his death. However, for reasons already stated, we have held no value is includible under section 811 (c). The Commissioner makes no contention that any value is includible under section 811 (a). Cf. Lloyd v. Commissioner, supra.

Decision will be entered under Rule 50.

Turner, dissenting: The grants in trust here involved were to certain beneficiaries for life, with remainders to their issue, but in the event they left no issue surviving, the remainders were to go to certain contingent remaindermen, or if they were dead, to their issue; *1106 but if they in turn had left no issue surviving, the trust estates were to revert*216 to the grantor. The exact language in two of the trusts is that in such event "the entire principal of the trust shall revert to the Grantor or to his legal representatives," while in the other three trusts the provision is, "then to the Grantor; or if the Grantor be deceased to the personal representatives of the Grantor, to be by them distributed to the next of kin of the Grantor * * *." It thus appears that the decedent, by specific provision in each of the trust instruments, reserved, and at all times held and retained, a possibility of reverter in the principal of each trust, which, according to the pronouncements of the Supreme Court in Helvering v. Hallock, 309 U.S. 106, requires the inclusion of such trust principal in the decedent's gross estate.

The Supreme Court, in Fidelity-Philadelphia Trust Co. v. Rothensies, 324 U.S. 108, after discussing the scope of Helvering v. Hallock, supra, and Klein v. United States, 283 U.S. 231, said: "The taxable gross estate * * * must include those property interests the ultimate possession or enjoyment*217 of which is held in suspense until the moment of the grantor's death or thereafter." In that case the interest in the trust property retained by the grantor was not nearly so broad as here. There the grantor reserved only the right to appoint by will the taker of the corpus in the event of the failure of certain contingent remaindermen to survive the life tenants, and if the grantor failed to exercise the power of appointment, the trust estate was to pass to certain charities named in the trust instrument. Holding that the "string or contingent power of appointment" was sufficient, under the statute, to require the inclusion of the trust corpus in the grantor's gross estate, the Court said: "The ultimate disposition of all the trust property was suspended during the life of the decedent. Only at or after her death was it certain whether the property would be distributed under the power of appointment or as provided in the trust instrument." Here, as in that case, the preference of the grantor obviously was that the trust property should go to his children and their issue, but, for reasons of his own, he was not willing to make, and did not make a full and complete grant of all *218 his rights and interest in the property to or for their benefit. Instead, he made the vesting of the estate of each and every remainderman contingent upon his (the remainderman's) surviving the holder of the life estate, retaining for himself a contingent reversion in the principal of each trust, which reversionary interest passed at his death to his personal representatives, and the ultimate disposition of the property -- whether it is to go to the remaindermen named in the trust instrument or is to go to the beneficiaries of the decedent's estate, as provided by his will or the laws of descent and distribution -- is suspended until the happening or failure of the contingencies which the decedent by the trust *1107 instrument has imposed. If in the Fidelity-Philadelphia Trust Co. case the retained power of appointment was a "string" sufficient to bring the trust corpus into the grantor's gross estate, then by comparison the reversionary interest retained by the grantor in the instant case approaches the proportions of a rope, or if not a rope, a cord, certainly much stronger than the string in the Fidelity-Philadelphia Trust Co. case.

It is accordingly my opinion that*219 the Court here is in error in excluding from the decedent's gross estate the principal of each of the above trusts, and for that reason I note my dissent.