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Estate of Leo M. Gartland v. Commissioner of Internal Revenue

August 4, 1961

ESTATE OF LEO M. GARTLAND, DECEASED, MATTHEW GARTLAND, ADMINISTRATOR, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT



Author: Platt

Before HASTINGS, Chief Judge, CASTLE, Circuit Judge, and PLATT, District Judge.

PLATT, District Judge.

This is a petition by Matthew Gartland, executor of the estate of Leo M. Gartland, deceased, to review a decision of the Tax Court (1960, 34 T.C. 867) adjudging a deficiency in the Federal estate tax of $84,321.08 in his father's estate, by the inclusion of the property valued at $258,968.29 in a trust created by Matthew F. Gartland, the petitioner's grandfather.

The facts of the case are uncontroverted. On July 10, 1929, decedent's father, Matthew F. Gartland, a resident of Indiana, set up a trust whereby he transferred certain assets to S. Roswell Shepherd of West Orange, New Jersey, as Trustee. On July 18, 1929, Shepherd accepted the trusteeship and five (5) days thereafter, under the authority of the trust agreement, appointed the National City Bank of New York as cotrustee and the Farmers Loan and Trust Company as successor trustee, should the appointed co-trustee resign. The National City Bank accepted this appointment, and on August 6, 1929, Shepherd resigned as co-trustee. On January 20, 1930, the National City Bank resigned as trustee and the City Bank Farmers Trust Company, successor to the Farmers Loan and Trust Company, accepted appointment as successor trustee. At the time of Leo M. Gartland's death, on April 1, 1955, the City Bank Farmers Trust Company was still acting as trustee.

Pertinent portions of the trust created by Matthew F. Gartland provided:

"1. In disposing of the income and principal of this trust the Trustee's duties shall be:

"A. To pay over to my son, Leo M. Gartland, so much of the income as the Trustee in his discretion shall deem advisable and to accumulate the remaining income and add it to the principal of the trust fund during the life of my said son.

"B. Upon the death of my said son to pay over the income to my daughter-in-law, Irene S. Gartland, during her life.

"C. Upon the death of the survivor of my said son and my said daughter-in-law, to divide the principal of the trust fund into so many equal shares that there shall be one for each child of my said son then living and one for the descendants then living of each deceased child of my said son, and to dispose of the income and principal of such shares as follows: * * *"

The trust further provided that the income be paid to each child until such child attained a certain age at which time the principal was to be distributed to such child, or as each might appoint by will, and if no appointment was made to the descendants of such child, and in default of descendants the trust was to be distributed to the descendants, if any, of the son of the Settlor, and in default of descendants of the son to the descendants of the Settlor, all in equal shares per stirpes. (The trust was modified to avoid a violation of the rule against perpetuities. This modification is immaterial here.) The trustee in his discretion could pay the minor children, or on their behalf, such portion of the principal he deemed advisable for their use and benefit; the trustee had full power to use the trust property in any way he deemed advisable; during the life of Leo M. Gartland, the decedent, the trustee was required to secure written approval of the decedent prior to the purchase or sale of any security which the trustee proposed to make. The trust then created a general power of appointment:

"8. I hereby authorize and empower my son, Leo M. Gartland, during his life, to amend or terminate this agreement in whole or in part and to change any beneficial interest hereunder by delivering to the Trustee an instrument in writing excuted by him. In the event of the termination of this trust by my said son, the Trustee shall pay over the principal of the trust fund to him or to such person or persons as he may designate in writing to the Trustee."

The trust also provided:

"12. The trust hereby created shall be irrevocable, shall take effect upon acceptance by the Trustee, and in all respects shall be governed by the laws of the state of New Jersey."

On May 16, 1931, the decedent sent a letter to the trustee which read in part:

"Owing to present conditions the writer finds it necessary to use the income of his trust. You may use this as your authority to transfer the cash in my principal account to the income account and send check at your convenience."

Pursuant to this letter, the trustee on May 19, 1931, paid the decedent $1,292.98, which was made up of $547.35 of prior accumulated income and $745.63 representing current income.The trustee in its letter replied in part:

"We are noting on our records that you wish all of the income remitted to you."

Decedent on January 19, 1938 ratified the 1931 payment by a document addressed to the trustee. A portion thereof read:

"WHEREAS, Subdivision 'A' of Article 1 of the aforesaid trust reads as follows:

"A. * * *

"WHEREAS, Article 8 of the aforesaid trust ...


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