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Estate of Maria Becklenberg v. Commissioner of Internal Revenue


December 30, 1959


Author: Knoch

Before SCHNACKENBERG, PARKINSON*fn1 and KNOCH, Circuit Judges.

KNOCH, Circuit Judge.

This matter comes to us on petition for review of a decision of the Tax Court of the United States, respecting the gross estate of Maria Becklenberg, deceased, for federal estate tax.*fn2

On March 17, 1934, decedent joined with her husband and son in establishing

Decedent $379,166.37 26.78%

Fred Becklenberg, Sr. 293,499.32 20.73%

Fred Becklenberg, Jr. 743,186.56 52.49%

No separate accounts were maintained. Several properties contributed by decedent were sold. No distribution was made. On August 12, 1938, the Trust was revoked and its assets transferred to a new Trust. This 1938 Trust provided for liquidation as expeditiously as possible and for purchase of annuities for specified members of the family, including one for decedent in the amount of $10,000 per year for life. Until purchase of the annuities, sums might be paid to the beneficiaries, not to exceed $10,000 annually in the case of decedent. No annuities were purchased during decedent's life. Certain payments were made to the beneficiaries, including payments not in excess of $10,000 annually to decedent.

The taxpayer argues that decedent retained no right to income; that she, in effect, bought a right to an annuity; that the payments actually made to her (out of income of the Trust, though not out of income of the specific assets she contributed to the Trust) could have been terminated at any time by purchase of an annuity for her. In any event, taxpayer concludes that decedent retained no right "[1] for [her] life; or [2] for any period not ascertainable without reference to [her] death; or [3] for such a period as to evidence [her] intention that it should extend at least for the duration of [her] life and [her] death occurs before the expiration of such period," in the words of Treasury Regulations 105, promulgated under the Internal Revenue Code of 1939, a Trust, to which each contributed assets then valued as follows: Section 81.18 (as amended byT.D. 6073, 1954-2 Cum. Bull. 280, 282.)

With respect to this argument the Tax Court held:

"The indisputable fact is that decedent received the right to annual payments of $10,000 from the 1938 trust until the trust purchased the annuity policy that would produce $10,000 annual payments from some insurance company. This is the way all of the donors construed the instrument and their interpretation was confirmed by the State Court. This is made abundantly clear by the claim for back payments made by decedent which was settled by the deed, the construction alleged in the interpretation suit, and the court decree, and the actual payment to decedent of $10,000 annually until she died. There is no merit in petitioner's argument that all decedent obtained under the 1938 trust was the right to compel the trustees to purchase an anuity that would give her annual payments of $10,000.00. The argument is foreclosed by the interpretation of the 1938 trust instrument by the donors and the Illinois Court."

The Superior Court of Cook County, Illinois, in Case Gen. No. 43-S-7734, construed the 1938 Trust in a suit brought in 1943 by Fred Becklenberg, Sr., as Trust Manager, and Fred Becklenberg, Jr., then sole Trustee. In their Complaint, they stated that, in their interpretation of the 1938 Trust, decedent was entitled to annual payments of $10,000 until the annuity was purchased.

The Superior Court approved the actions, accounts, and interpretation of Fred Becklenberg, Sr., and Fred Becklenberg, Jr., and decreed (inter alia) that wide discretion was vested in the Trustee and the Trust Manager as to when, or whether, the annuities should be purchased; that, in view of changed conditions and circumstances, distribution to certain named members of the Becklenberg family need not be restricted to the purchase of life insurance annuities, but that the 1938 Trust Agreement authorized distribution to them, of income, principal or proceeds, "having due regard, however, to the preservation of sufficient of the principal or corpus of said Trust Estate to assure annual payments provided for under said Trust Agreement" including the $10,000 annual payment to decedent.

The Superior Court further provided, in connection with such distribution for certification that "the remainder of the principal or corpus of said Trust Estate is amply sufficient to assure the payments provided * * * to be made" including that to decedent. During the years 1940 through 1951, decedent did receive approximately $10,000 annually.

The Tax Court held that decedent had retained the right to receive annual distributions of $10,000 from the income of the 1938 Trust and that, therefore, the amount of corpus necessary to produce such income was includible in her gross estate for purposes of the federal estate tax. The Tax Court capitalized the annual payment of $10,000 by the average rate of return of income on the trust property (which the Tax Court found to be 0.03455%) or $289,855.07, to find the amount includible in the gross estate.

We agree that decedent (under the interpretation made by the Superior Court of Cook County) retained a right to receive $10,000 annually, by way of annuity or by distribution from the Trust. Although this sum was, in fact, paid to decedent out of the income of the Trust for most years, it does not appear that the payments were restricted to income. In 1942, in settling decedent's claim for deficiencies in payments previously made to her, a portion of the corpus was distributed to decedent with approval of the Superior Court. Under the 1938 Trust, payments might be made from principal. Under the construction of the Superior Court, decedent would have had to be paid $10,000 anually, even though the Trust produced an income of less than $10,000, and it had been necessary to invade corpus. Unlike the Tax Court, we believe that the Trust had an obligation to pay decedent $10,000 annually, and that her right to receive it was not limited to the property transferred by her or the income therefrom.

The Tax Court has computed the amount of the Trust assets to be includible in decedent's gross estate as though the Trust here required decedent to be paid $10,000 out of taxable income, whereas decedent could have been paid out of principal. She retained the right to receive $10,000 annually for life; she did receive $10,000 annually for life. Thus at her death, there was nothing left to be included in her gross estate.

The case before us is clearly distinguishable from the cases cited by the Commissioner. In both Estate of Moreno v. Commissioner, 8 Cir., 1958, 260 F.2d 389, and Toeller's Estate v. Commissioner, 7 Cir., 1948, 165 F.2d 665, the Trust provided for distribution of all income with a further provision for invading the corpus for specified emergencies.

Unlike the Commissioner and the Tax Court, as indicated above, we do see similarities between the case before us and the line of cases mentioned in FidelityPhiladelphia Trust Co. v. Smith, 1958, 356 U.S. 274, 280-281 footnote 8, 78 S. Ct. 730, 733, 2 L. Ed. 2d 765, where the Supreme Court said:

"Where a decedent, not in contemplation of death, has transferred property to another in return for a promise to make periodic payments to the transferor for his lifetime, it has been held that these payments are not income from the transferred property so as to include the property in the estate of the decedent. (Citing cases.) In these cases the promise is a personal obligation of the transferee, the obligation is usually not chargeable to the transferred property, and the size of the payments is not determined by the size of the actual income from the transferred property at the time the payments are made."

In Estate of McNichol v. Commissioner, 3 Cir., 1959, 265 F.2d 667, and other cases like it, cited by the Commissioner, the decedent purported to convey incomeproducing property without reservation, but actually did make contemporaneous oral agreements (or other arrangements) under which he was to receive the income, and under which he did, in fact, receive the income until his death.

Because of the basis on which this case has been determined, we do not reach various other questions respecting such matters as, for example, valuation of assets which decedent transferred to the Trust, or computation of the amount of corpus which would have been needed to produce an income of $10,000 annually, had decedent retained the right to receive payments of $10,000 annually, limited to income of the Trust.


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