Wetherill v. Commissioner , 4 T.C. 678 ( 1945 )

Estate of Horace G. Wetherill, Deceased, J. A. Cornett, as Administrator of the Estate of Said Horace G. Wetherill, Deceased, Petitioner, v. Commissioner of Internal Revenue, Respondent. Horace G. Wetherill Trust -- Crocker First National Bank of San Francisco, Individually, and as Trustee of Said Trust, Petitioner, v. Commissioner of Internal Revenue, Respondent. Board of Regents of the University of Colorado, Petitioner, v. Commissioner of Internal Revenue, Respondent

Wetherill v. Commissioner

Docket Nos. 1275, 1276, 1277

United States Tax Court

4 T.C. 678; 1945 U.S. Tax Ct. LEXIS 242;

January 31, 1945, Promulgated

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Decision will be entered under Rule 50.

The trust indenture executed by Horace G. Wetherill provided that following his death the net income from the trust corpus should be paid to his wife during her lifetime and upon her death to the Board of Regents of the University of Colorado. The trust instrument also provided that, if the trustor's wife should become incapacitated after his death, the trustee should use any part or all of the trust fund for her care, maintenance, and support and that, further, it should pay out of the principal any extraordinary expenses arising from injury, illness, or disability, provided his wife should state to the trustee that she had insufficient funds to provide for such extraordinary expenses. After trustor's death no part of the income or corpus was paid to his widow. Held, that the gift to the regents was capable of calculation with reasonable accuracy and deductible in computing estate taxes.

Charles G. Heimerdinger, Esq., for the petitioners.

T. M. Mather, Esq., for the respondent.

Van Fossan, Judge.

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VAN FOSSAN

The respondent determined a deficiency of $ 4,347.19 in the estate tax of the estate of Horace G. Wetherill, deceased. He also determined the same amount for assessment against the Crocker First National Bank of San Francisco as trustee and transferee and also against the Board of Regents of the University of Colorado as transferee of the property of the estate.

The single issue is whether or not the amount of the bequest to the Board of Regents of the University of Colorado, a corporation duly qualified under section 812 (d) of the Internal Revenue Code, is deductible from the gross estate of Horace G. Wetherill, pursuant to the provisions of that section.

It is stipulated that, if the estate is liable for the deficiency in tax, each of the transferees is also liable for the tax.

FINDINGS OF FACT.

The facts were either stipulated or admitted in the pleadings, and as so stipulated and admitted they are adopted as findings of fact. The portions thereof material to the issue are as follows:

Horace G. Wetherill died on January 24, 1941. At the time of his death he was a resident of Monterey County, California. The Federal estate tax return for his estate was filed with the collector of internal revenue for the first district of California. On August 24, 1942, J. A. Cornett was appointed and is the duly qualified administrator of the estate of the decedent.

On or about October 29, 1940, the decedent, as trustor, made and entered into a certain trust agreement, creating an irrevocable trust, with the Crocker First National Bank of San Francisco, to which he transferred certain securities. The trust was never revoked, amended, or in anywise modified.

The trust indenture provided that the decedent should receive the net income during his lifetime and, in the event he should become incapacitated, the principal should be used for his care, maintenance, and support. It also directed the trustee to pay the expenses of the trustor's last illness and funeral if such expenses were not paid with other funds within thirty days after his death. The trustor also directed the trustee to pay four specific donations upon the decedent's death.

Articles V and VI of the trust instrument are as follows:

ARTICLE V.

Following the death of said Trustor and after the payments hereinbefore in Articles III and IV mentioned have been made or provided for, the Trustee shall thereafter pay all of said net income from said trust to said Trustor's wife, Nellie A. Wetherill, during her lifetime.

In the event Trustor's said wife is or becomes incapacitated after the death of said Trustor, the Trustee shall pay said net income and any part, or all, of the principal of said trust fund for her care, maintenance, and support. Said Trustee shall also pay out of said principal of said trust fund for any extraordinary expenses caused by an emergency created by her injury, illness, or disability, provided Trustor's said wife states to Trustee that she has insufficient funds to provide for such extraordinary expenses. Said Trustee shall also pay from the principal of said trust the expenses of the last illness and funeral of Trustor's wife, provided they are not paid from other funds within thirty (30) days after her death.

Article VI.

Upon the death of the survivor of the Trustor and his said wife and after the payments hereinbefore in Articles III, IV, and V mentioned have been made or provided for, the Trustee shall distribute the entire balance and remainder of the trust estate, both principal and income, to the Board of Regents of the University of Colorado, as the same may then or thereafter be constituted, which balance and remainder, together with any additions thereafter made thereto by any person or corporation, shall be known as The Horace G. Wetherill Trust Fund and shall be held, administered, used, and distributed by the said Board of Regents as follows:

* * * *

The fund was to be used for the benefit of the Medical School of the University of Colorado. Other provisions of the trust indenture are not pertinent to the issue.

The assets of the trust had a value of $ 106,373.56 at the time of the decedent's death. They were valued at $ 98,997.57 in the estate tax return, pursuant to the optional method of valuation provided in section 811 (j) of the Internal Revenue Code.

At the time of the creation of the trust, and at all times since such creation, the Board of Regents of the University of Colorado was, has been, and now is a corporation organized and operated exclusively for scientific and educational purposes, no part of the net earnings of which inures to the benefit of any private stockholder or individual, and no substantial part of the activities of which is carrying on propaganda or otherwise attempting to influence legislation.

At the time of the death of Horace G. Wetherill his wife, Nellie A. Wetherill, was 79 years of age. Nellie A. Wetherill died on December 3, 1941, less than one year after the date of the death of her husband. Nellie A. Wetherill had a personal estate of her own of a value in excess of $ 100,000 at the time of the creation of the trust and at all times thereafter until the time of her death. Her estate was appraised for inheritance and estate tax purposes at about $ 110,000.

In the year 1941 Nellie A. Wetherill had a net income of $ 5,075.63, exclusive of the income of the trust. The income of the trust which became distributable to her during the year 1941 amounted to approximately $ 3,000. In 1940 her net income amounted to $ 5,000. In neither the year 1940 nor the year 1941 did her living expenses exceed $ 5,000.

Nellie A. Wetherill resided at the Forest Hill Hotel in Pacific Grove, California, from January 25 to July 25, 1941, and her lodging and meals were furnished by that hotel for $ 140 per month. On July 25, 1941, she moved to the Morgan Cottage, a nursing home in Carmel, California, in which she resided until her death on December 3, 1941. The cost, including nursing service, during her residence at the Morgan Cottage was $ 50 per week.

On or about May 28, 1941, the Crocker First National Bank of San Francisco received from Nellie A. Wetherill a letter reading as follows:

Forest Hill Hotel,

Pacific Grove, Cal.

Mr. L. A. McCrystle

Trust Officer,

Crocker 1st Nat. Bank --

Dear Mr. McCrystle: Thank you for your letter of May 24th. It will be quite all right if you send me the semi-annual statement of Dr. Wetherill's Trust Fund. At present, I do not need to draw from it for myself as my private income is quite sufficient for my needs, and I am anxious to keep the fund as large as possible for the bequest to the Denver Medical School. I may even add to it myself.

Thanking you for all your kindness and interest.

Sincerely yours,

Nellie A. Wetherill.

No income nor any part of the principal of the trust was ever paid to Nellie A. Wetherill during her lifetime. After her death the trustee expended the sum of $ 1,969.30 out of the trust fund in payment of expenses of her last illness and funeral.

The gift to the Board of Regents of the University of Colorado was capable of calculation with reasonable accuracy.

OPINION.

The issue here is whether or not the estate's right to a deduction under section 812 (d) of the Internal Revenue Code is defeated by the fact that the value of the gift to the Board of Regents of the University of Colorado can not be determined because the trust instrument permitted the invasion of the trust corpus for the benefit of the decedent's wife.

The question in all cases of this character must be answered by the precise phraseology of the trust or will. Generally speaking, such instruments fall into two classes: (1) Those in which the language permitting the invasion of corpus is confined to the continuation of the beneficiary's life on the same plane and according to the same standard of living as those normally existing before the gift, and (2), those in which the donor injects some element of additional and enlarged enjoyment of the gift, directs invasion when the beneficiary "desires" that expenditures be made for her happiness, pleasure or comfort, and enjoins on the trustee a liberal or generous use of the power so granted.

In cases of the first class, the amounts needed to provide for the care and support of the life beneficiary can be ascertained with reasonable certainty, and thus such directions of the trustor do not defeat the charitable bequests. Provisions relating to illness, injury, or incapacity such as are found in the trust before us do not enlarge or extend the nature of the prescribed expenditures, but merely define and emphasize them. They are of the kind normally expected in the preservation and continuation of the beneficiary's usual mode of living.

In the cases of the second class, the element of speculation is added, thus making the amounts spent for the life beneficiary -- and hence the amounts ultimately distributed to charity -- impossible of calculation with reasonable accuracy.

For many years the leading and controlling case on this subject has been Ithaca Trust Co. v. United States, 279 U.S. 151">279 U.S. 151. There the trustor authorized the invasion of the corpus for any sums "that may be necessary to suitably maintain her in as much comfort as she now enjoys." There the court stated that the standard was fixed in fact and capable of being stated in definite terms of money, observing that the income for the estate was more than sufficient to maintain the widow as required and that "there was no uncertainty appreciably greater than the general uncertainty that attends human affairs." The Court held that the bequests to charity were allowable.

The two leading cases in the Ninth Circuit, both decided on facts quite similar to those in the case at bar, are Commissioner v. Bank of America National Trust & Savings Association (Mayo estate), 133 Fed. (2d) 753, and Commissioner v. Wells Fargo Bank & Union Trust Co. (Hume estate), 145 Fed. (2d) 130. In both cases the court allowed the deduction.

In the Mayo case the testator bequeathed certain property in trust from which the trustee was directed to pay $ 250 per month to the testator's sister and, "in case she should, by reason of accident, illness or other unusual circumstance so require, such additional sum or sums as in the judgment of said trustee may be necessary and reasonable under the existing conditions." The value of the gross estate was over $ 114,000. The sister was 78 years of age at the time of the decedent's death. She had property valued at $ 26,900, from which she received an annual income of about $ 900. She used her own income for her needs and deposited a large part of the monthly payments in her savings account. The court held that, although the beneficiary's activities had been greatly restricted due to impaired eyesight and advanced age, the invasion of corpus was remote and not sufficiently probable to affect the charitable bequest.

In the Hume case the testator directed that the income from a trust fund should be paid to her niece for life, with charitable organizations as residuary legatees. The trustees were empowered to apply such part of the principal as they deemed reasonable to assist the niece in case of her need "on account of any sickness, accident, want or other emergency." The appraised value of the decedent's residuary estate was $ 130,000. The niece was 54 years old and owned property valued at $ 35,000. She received $ 300 per month from the trustees. The court there also held that the bequests to charitable institutions were deductible.

The decisions in both the Mayo and Hume cases relied largely on the reasoning in the Ithaca Trust Co. case.

The case at bar presents facts essentially the same as those in the two cases just cited. Here, none of the trust income or principal was needed by Mrs. Wetherill or paid to her. Her own estate was appraised at $ 110,000. Her living expenses, including the charges of a nursing home, did not exceed the income from her own property. The sum of almost $ 2,000 was expended by the trustees to cover the cost of her last illness and funeral, but that amount was less than the annual trust income distributable to her. Furthermore, such expenditure may have been compelled by the thirty-day limitation set in the trust indenture.

The trustee is directed to pay any part of the trust principal for Mrs. Wetherill's "care, maintenance and support" and for any extraordinary expenses due to injury, illness, or disability, provided, however, that she shall state to the trustee that she has insufficient funds for such expenses. The record discloses that she not only did not state to the trustee that her own funds were insufficient, but she specifically refused to accept even income from the trust fund. At the same time she expressed her deep personal interest in the object of the charity, this fact making it practically unlikely that she would ever invade the corpus. Thus, the facts here bring this case directly under the rule of the Ithaca Trust Co. case, followed in the Mayo and Hume cases.

The respondent argues that the recent case of Merchants National Bank of Boston v. Commissioner (Field estate), 320 U.S. 256">320 U.S. 256, decided November 15, 1943, controls the situation before us. We do not agree. In that case, which falls within the second class described above, the Court distinguished the facts of the Ithaca Trust Co. case from the facts there under consideration. The Court did not condemn or overrule the principles set forth in the Ithaca Trust Co. case, but rather approved them when applied to appropriate cases. ¹ In the Hume case, decided October 11, 1944, the Circuit Court of Appeals for the Ninth Circuit was well aware of the effect of theField case decision and quoted a part of the excerpt in the footnote. The court there said:

In the instant case there is substantial evidence to support the finding of the Tax Court concerning the remoteness of invasion of the trust corpus. The taxpayer has shown with sufficient certainty that the entire amount of the principal will be available for charitable purposes in accordance with the directions in the will by a showing of the beneficiary's advanced age, frugality over a long period of time, and independent means. The Merchants National Bank case, supra, is clearly distinguishable on its facts. The opinion therein emphasizes the possibility under the will of draining corpus for the widow's happiness through the trustee's exercise of "discretion with liberality," a highly speculative element, which is absent in the instant situation. We therefore find no error.

So here, we find that Mrs. Wetherill was a woman of advanced years, had ample independent means, lived modestly, and was conspicuously economical in the use of money. Therefore, on the authority of the Hume, Mayo, and Ithaca Trust Co. cases, we approve the petitioner's contention.

Decision will be entered under Rule 50.

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Footnotes

• 1. "* * * Only where the conditions on which the extent of invasion of the corpus depends are fixed by reference to some readily ascertainable and reliably predictable facts do the amount which will be diverted from the charity and the present value of the bequest become adequately measurable. And, in these cases, the taxpayer has the burden of establishing that the amounts which will either be spent by the private beneficiary or reach the charity are thus accurately calculable. Cf. Bank of America Nat'l. Trust & Savings Ass'n. v. Commissioner, 9 Cir., 126 Fed. 2d 48.

  In this case the taxpayer could not sustain that burden. Decedent's will permitted invasion of the corpus of the trust for "the comfort, support, maintenance and/or happiness of my wife." It enjoined the trustee to be liberal in the matter, and to consider her "welfare, comfort and happiness prior to the claims of residuary beneficiaries," i. e., the charities.

  Under this will the extent to which the principal might be used was not restricted by a fixed standard based on the widow's prior way of life. Compare Ithaca Trust Co. v. United States, 279 U.S. 151">279 U.S. 151, 49 S. Ct. 291">49 S. Ct. 291, 73 L. Ed. 647">73 L. Ed. 647. * * * The salient fact is that the purposes for which the widow could, and, might wish to have the funds spent do not lend themselves to reliable prediction. This is not a "standard * * * fixed in fact and capable of being stated in definite terms of money." Cf. Ithaca Trust Co. v. United States, supra↩."Introducing the element of the widow's happiness and instructing the trustee to exercise its discretion with liberality to make her wishes prior to the claims of residuary beneficiaries brought into the calculation elements of speculation too large to be overcome, notwithstanding the widow's previous mode of life was modest and her own resources substantial. * * *"