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Commissioner of Internal Revenue v. Irving Trust Co.

March 5, 1945

COMMISSIONER OF INTERNAL REVENUE
v.
IRVING TRUST CO. (TWO CASES). SAME V. HALL.



Author: Hand

Before SWAN, AUGUSTUS N. HAND, and CHASE, Circuit Judges.

AUGUSTUS N. HAND, Circuit Judge.

The decedent, Hugh M. Beugler, died on July 16, 1939. The respondent, George E. Hall, became the administrator c.t.a. of his estate and upon the death of George E. Hall, while this proceeding was pending, Harriet E. Hall was appointed administratrix in his stead. Beugler established two inter vivos trusts, the first by deed dated October 22, 1927, and the second by deed dated April 5, 1930. The Iriving Trust Company is the trustee under each trust.

Under the first deed of trust, and the escrow letter of even date, the trust was to become effective upon the delivery of a certified copy of a valid decree of divorce of Hugh M. Beugler from his wife Bertha L. Beugler which should not contain any provision for the payment of alimony to her; of an instrument terminating an existing separation agreement between the parties, and a release by her of her rights of dower. These three conditions were fulfilled and the first trust became effective on May 29, 1928. The corpus of the first trust then consisted of 4,000 shares of common stock of Central Hudson Gas & Electric Corporation having a total value of $240,000. Under its terms the trustee was to pay Bertha L. Beugler $150 per month from the income during her life and the balance to the settlor. Upon his death the trustee was to set apart so much of the principal as might be sufficient to produce the income payable to Bertha L. Beugler and was to pay any surplus income to the settlor's issue per stirpes. After providing for payment of the $150 per month to Bertha L. Beugler the first trust deed provided that the principal of the trust was to pass upon the settlor's death to his issue per stirpes and in default of issue to such persons as would be entitled thereto under the laws of the State of New York if the settlor had then died intestate possessed of such property as his personal estate. It was also provided in the first deed of trust that:

"The Trustee may from time to time in its absolute discretion, and as often as it deems advisable to pay over, transfer, convey, assign and deliver to the Settlor all or any part of the principal of the said trust fund, at all times retaining, however, a sufficient Principal Fund to provide the income to be paid to Bertha L. Beugler as aforesaid, and upon such payment or transfer, all obligation of the Trustee in reference to that part of the principal so paid over shall forthwith cease."

Subsequent to May 29, 1928 Beugler married Lois Dale who became his wife Lois Dale Beugler accordingly.

On April 5, 1930 Beugler delivered a letter to the trustee of the first trust requesting the latter to deliver to him certain of the shares of stock of the Central Hudson Gas & Electric Corporation, which then formed a part of the corpus of the first trust, and stating that it was his "purpose to create a new trust with these securities of which you shall also be trustee and which will in all respects be generally similar except that Lois Dale Beugler will be the beneficiary in place of Bertha L. Beugler and will have an annual income of $2500 under the trust created by the new indenture." On the same day Beugler delivered to the trustee the indenture covering the second trust together with the stock he had just received in answer to his request, which had a then market value of $131,250. The provisions of this second trust were similar to those of the first trust except that the settlor's second wife Lois Dale Beugler was to be the beneficiary under the second trust and was to receive an annual income of $2500, instead of $150 per month, during her life and so long as she did not remarry. This trust contained the following provision analogous to the one quoted from the first trust:

"The Trustee, in its absolute discretion, may from time to time, and as often as it deems advisable, pay over, transfer, convey, assign and deliver to the Settlor all or any part of the principal of the said trust fund, at all times retaining, however, a sufficient principal fund to provide the income to be paid to Lois Dale Beugler as aforesaid, and upon such payment or transfer, all obligation of the Trustee in reference to that part of the principal so paid over shall forthwith cease."

On July 12, 1930, in an action brought by Beugler, his marriage with Lois Dale Beugler was dissolved.

The trustee in addition to the shares of Central Hudson Gas & Electric Corporation which it had delivered to Beugler from the corpus of the first trust in order to establish the second trust, from time to time delivered to him, at his request, portions of the corpus of the first trust in securities and cash to the aggregate of $44,992.68.

The trustee never paid any portion of the principal of the second trust to Beugler. On the latter's death on July 16, 1939 he left surviving his third wife, Martha B. Beugler, his daughter Nan B. Vail, and three grandchildren, and also his first wife Bertha L. Beugler and his second wife Lois Dale Beugler, who had not remarried. Martha B. Beugler died on September 12, 1939.

In assessing the estate tax of Beugler the Commissioner included in the gross estate the corpus of each of the trusts after deducting the value of the life estate of Bertha L. Beugler in the first trust and the value of the life estate of Lois Dale Beugler in the second trust. The net value of the first trust incorporated in the estate was $213,958.84, and the net value of the second trust also incorporated in the estate was $26,216.05. Through such inclusions the Commissioner determined a deficiency in estate tax of $27,743.74 which he sought to collect from the Irving Trust Company as transferee because George E. Hall as administrator d.b.n., c.t.a., had no assets with which to pay it.

The Tax Court held that the net value of the two trusts arrived at by deducting the values of the respective life estates was not includible in the decedent's gross estate under Sections 811(c) or 811 (d) (2) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev. Code, ยงยง 811(c), (d) (2).In our opinion this conclusion was right and the decision of the Tax Court should be affirmed.

Sections 811(c) and 811(d) (2) of the Internal Revenue Code as they existed prior to the amendments of 1931 may be found in Section 302 of the Revenue Act of 1926 as it read at the time of the establishment of the trusts. This section of the Revenue Act ...


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