Estate of McCabe v. United States

475 F.2d 1142, 201 Ct. Cl. 243, 31 A.F.T.R.2d (RIA) 1403, 1973 U.S. Ct. Cl. LEXIS 193

• Court: United States Court of Claims
• Decided: March 16, 1973
• Docket: No. 115-70
• Status: Published

Opinion

Per Curiam :

This case was referred to Trial Commissioner David Schwartz with directions to make findings of fact and recommendation for conclusions of law under the order of reference and Rule 134(h). The commissioner has done so in an opinion and report filed on August 2,1972. Exceptions to the commissioner’s opinion, findings and recommended conclusion of law were filed by plaintiff, defendant filed exceptions to certain findings and the case has been submitted to the court on oral argument of counsel and the briefs of the parties. Since the court is in agreement with the opinion and recommendation of the commissioner, with a modification by the court, it hereby adopts the same, as modified, as the basis for its judgment in this case as hereinafter set forth. Therefore, plaintiff is not entitled to recover and the petition is dismissed.

Commissioner Schwartz’ opinion, with a modification by the court, is as follows:

This is a suit for the recovery of estate faxes 'and assessed interest, to a total of $30,346.45, paid by the estate of Eugene E. McCabe, who died in 1964. Three questions are presented: (1) what is the proper valuation of decedent’s residence; it is held that the residence had the value fixed by the Commissioner of Internal Revenue; (2) whether a certain inter vivos trust was a transfer with such a retained life estate as made it properly includible in the gross estate under subdivision (1) of §2036(a) of the 1954 Code; it is held that it was; and (3) whether a testamentary trust of which decedent’s widow was a beneficiary failed to qualify, by virtue of § 2056(b) (5) of the 1954 Code, for the marital deduction under § 2056(a) ; it is held that the trust does not qualify, for the reason that the widow’s power of appointment was not exercisable by her alone and in all events.

A fourth issue sought to be raised is the propriety of the Commissioner’s disallowance, as a deduction from the gross estate, of a widow’s allowance paid pursuant to probate court order. This ground for refund was first mentioned in plaintiff’s post-trial brief in this court; it was not raised in the administrative claim for refund and in the petition in this court. The failure to raise it before the Commissioner of Internal Revenue in the claim for refund bars its consideration in this judicial proceeding. Union Pacific R.B. Co. v. United States, 182 Ct. Cl. 103, 389 F. 2d 437 (1968); 26 U.S.C. § 7422 (a) (1964). True, plaintiff demanded, in both its claim for refund and in its petition in this court, the entire amount of the deficiency which had been assessed and paid, an amount which would be refundable only if the widow’s allowance were a proper deduction. Numbers alone, however, cannot satisfy the 'rule that a claim for refund must set out the grounds upon which it rests. Plaintiff cannot make out a case, either before the Commissioner or in court, merely by demanding more money than is warranted by the allegations. H. H. Hornfeck & Sons, Inc. v. Anderson, 60 F. 2d 38, 41 (2d Cir., 1932).

1. Valuation of Decedent's Residence

Decedent’s residence, jointly owned with his wife, was valued at $57,500 in the tax return filed by his estate and at $64,500 by the Commissioner of Internal Revenue.

The two appraisers appointed by the probate court testified in support of their valuation of $57,500. The Govern-meat’s expert testified to a valuation of $67,000. The qualifications of the respective appraisers, the bases for their valuation and the facts as to what they considered, and how thoroughly, are set out in the accompanying findings.

Plaintiff’s appraisers did a perfunctory job of their appraisal. Notably, they failed to take into account the increase in value which would be gotten by a quite feasible subdivision into three parcels of the 6.8 acre lot on which decedent’s house stands. The Government’s witness, on the other hand, has impressive qualifications, made an industrious appraisal and provided evidence in support of his opinion that the house and lot were worth $67,348 on a cost-reproduction basis and $67,000 on a direct-market-comparison or comparable-sales basis.

On the basis of that witness’ testimony, it is found that the property — land and improvements — was worth at least $64,500, the figure accepted by the Commissioner of Internal Revenue. It is unnecessary to determine whether the property was any more valuable than that. Accordingly, plaintiff is not entitled to recover on the issue of valuation.

2. The Inter Vivos Trust

On May 16,1940, decedent by an indenture created a trust of insurance policies on his life with a total face value of $75,000. His wife thereafter transferred to this trust shares of stock worth $6,300. The trust instrument provided that the income from the trust was to be paid to decedent’s wife for life, with a remainder to decedent’s children.¹ The trustees were Russell J. Hopkins, president of the Titusville Trust Co. of Titusville, Pennsylvania, and the Trust Company. The value of the assets in the trust as of the date of decedent’s death in 1964, exclusive of any corpus contributed by his widow, Dorothy McCabe, was $18,298.66.

The question for decision is the includibility of this sum in decedent’s gross estate under § 2036(a) of the 1954 Code. More precisely, the question is whether in making the transfer the decedent had, in the words of the section, retained for his life “the possession or enjoyment of, or the right to the income from, the property,” within the meaning of subdivision (1) of § 2036(a). The section reads as follows (26 U.S.C. § 2036(a) (Supp. V, 1959-1963)) :

§ 2036. TRANSFERS WITH RETAINED LlFE ESTATE.

(a) General rule.

The value of the gross estate shall include the value of all property to the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money’s worth), by trust or otherwise, under which he has retained for his life or for any period not ascertainable without reference to his death or for any period which does not in fact end before his death—

(1) the possession or enjoyment of, or the right to the income from, the property, or

(2) the right, either alone or in conjunction with any person, to designate the persons who shall possess or enjoy the property or the income therefrom.

The decision herein is that decedent retained such a life interest as is described in subdivision (1) of §2086(a). A contention of taxability under subdivision (2) of § 2036(a), based upon the retention in Article Twelfth (note 1, supra) of the power to substitute the donor as trustee, therefore need not be considered.

At the time the trust was created in 1940, decedent was employed by the Tidewater Associated Oil Company. He retired as a vice president in 1959. Upon his retirement, he ceased to receive his annual salary of $30,000, and became a consultant at a compensation which does not appear.

Following decedent’s retirement in 1959, the cash surrender value of the insurance policies in the trust was taken by the trustees, by mutual agreement of decedent, decedent’s wife and the trustees. Substantially all of the dealings with regard to the trust took place between decedent and the individual trustee, Russell J. Hopkins, who was his longtime friend and business associate.

Between 1959 and 1964, the year of decedent’s death, funds from the corpus of the trust were devoted by the trustees as follows:

At the trial, decedent’s widow could not recall ever having seen the 1940 trust agreement, nor could she recall her husband’s having explained its terms to her. She was certain that no one at the Trust Company had ever done so.

None of decedent’s children was aware of the 1940 trust agreement except through informal family conversations. With some small exceptions, they did not know the nature or amount of the trust assets, the nature of their respective interests, the identity o'f the trustees, the taking of the cash surrender value of the life insurance policies or the amounts withdrawn from the trust. They were not consulted with regard to any of the transactions regarding the trust, nor was any evidence presented which would show that any of the four children received money from their parents or from the trust for support, medical assistance or educational purposes during the period 1959-1964.

Prior to decedent’s retirement in 1959 and subsequent to his death on August 28,1964, no distributions of trust corpus were requested or made. From 1959 until decedent’s death, all requests for cash distributions of trust corpus (set out in the foregoing table) were prepared by and at the direction of decedent, for his wife’s signature. The distributions were deposited in decedent’s checking account, by the trustees acting upon Dorothy McCabe’s request, and were applied to the joint and personal use and benefit of decedent and his wife, including the costs of children’s weddings and personal vacations.

There is no question but that decedent did not, by the terms of the instrument of transfer, expressly retain the life interest that would make §2036 (a)(1) applicable. A retained life interest need not, however, necessarily be created by the express terms of the instrument, nor need it be legally enforceable, for § 2036(a) (1) to apply.² McNichol's Estate v. Commissioner, 265 F. 2d 667 (3d Cir.), cert. denied, 361 U.S. 829 (1959). A retention of the “possession or enjoyment of, or the right to the income from, the property” may be inferred from the circumstances attendant upon the transfer and the manner in which the transferred property is used. Skinner’s Estate v. United States, 316 F. 2d 517 (3d Cir. 1963); see also Barlow v. Commissioner, 55 T.C. 666 (1971).

Both McNichol and Skinner were factually different from the instant case. McNichol involved a purported outright gift of income-producing property by a father to his children, coupled with a contemporaneous oral agreement between the donor and the donees that the donor would continue to receive the income from the property until his death. In Skinner, the trust instrument gave the trustee discretion to pay the income from the trust to the settlor during her lifetime, a discretion which he exercised in her favor until her death.

The facts of the instant case however show as clearly as in those cases a retained life interest. Decedent was not a detached settlor, and the trustee (to all intents the individual trustee was the sole trustee) did not act exclusively for the benefit of the ostensible beneficiary, Mrs. McCabe. The dealings among the three of them — decedent, trustee and wife— in my opinion raise an inference of a prearrangement that decedent should retain control for his benefit so long as he lived. In these dealings, Mrs. McCabe and the trustee recognized and surrendered to the decedent’s interests, throughout.

After decedent retired in 1959 (and his income thereby diminished) substantial cash distributions were at four separate times made from the trust corpus to the decedent, presumably a settlor who had parted with his interest and had no rights. After the first of these distributions, trustee Hopkins requested that decedent have his wife execute “a letter * * * authorizing the $3,000 transfer to your [decedent’s] checking account.” The succeeding cash withdrawals were made pursuant to the written request of decedent’s wife, who additionally directed that these sums be deposited in her husband’s checking account.

The only provision of the trust under which the corpus could be invaded for the benefit of decedent’s wife, Article Fifth (note 1, supra) was conditioned on her illness or an emergency, and an exercise of judgment by the trustee as to the amount, additional to income, necessary to provide proper care for Mrs. McCabe. This was ignored. The trustee made no inquiry into her situation to determine whether she was beset by illness or emergency when she requested distributions of corpus; and plaintiff provides no basis for any conclusion that the uses to which the distributions were put fall within the provisions of Article Fifth for Mrs. McCabe’s benefit. Eather, it appears that the three parties at all times treated the decedent as having the right to receive the trust corpus, exercisable on the mere formality of his wife’s demand.

Consistent with this conclusion is the language in Mrs. McCabe’s second letter requesting a distribution of corpus to her husband:

In view of the rights and privileges granted to me under the above mentioned trust agreement, I now request that you permit me to withdraw from the trust the cash on hand, namely $3,163.08, depositing it in Titusville Trust Company to the credit of my husband Eugene F. McCabe. In consideration of so doing I hereby agree to protect and save the trustees harmless and free from any liability or any claim that may be made upon them by reason of releasing the above sum to me.

Similar language was contained in three of the four such letters she wrote, authorizing the four noted cash distributions. None of the letters contained any statement as to the purposes for which the money was required.

A pretended transfer to a wife, with the retention of a life estate by the husband so apparent from the facts as here, is the archetypal situation reached by subdivision (1) of § 2036 (a). The property is includible in the gross estate.

3. The Testamentary Trust

The issue in this last part of the case is whether one of the trusts created by the will, “Trust Fund A,” is such a life estate with, power of appointment in a surviving spouse as permits its value to be deducted from the gross estate. The precise questions are whether the power is exercisable by the surviving spouse “alone and in all events” and whether there is a power in any other person to appoint “to any person other than the surviving spouse.” 26 U.S.C. § 2056(b) (5) (1958).³ Only if the first question is answered in the affirmative, and the second in the negative, is the value of the interest deductible from the gross estate under § 2056(a).

Article Second of the will (set out in the note⁴) divided the estate equally between two trusts, Trust Fund A and Trust Fund B, and provided that the income of Trust Fruid A should go to the widow for her life, she to have power to “use” any part of the principal in her discretion, any balance remaining at her death to be added to Trust Fund B (in which, at that time, the income beneficiaries and remainder-men (at stated ages) would be decedent’s surviving children and issue).

Section 2056(b) (5) of the 1954 Code (note 3, supra) requires, if a life interest with a power to appoint to a spouse is not to be included in the gross estate under § 2056(a), that the power to appoint be exercisable by the spouse “alone and in all events.” Under the regulations the power is not exercisable “alone and in all events” unless it falls within one of three categories, one of which is that the power be “fully exercisable 'in her own favor at any time following the decedent’s death (as, for example, an unlimited power to invade).” Moreover, the power is not exercisable “in all events” if there be any restrictions on the power to consume the property, as for instance “if a power of invasion is exercisable only for the spouse’s support, or only for her limited use,” or if the trustee has power “to appoint a part of the interest to any person other than the surviving spouse." Treas. Reg. § 20.2056 (b)-5 (1964).⁵

These conditions are not met, the Government first contends, because the widow’s right, under Article Second of the will (note 4, supra), to “use” amounts out of principal is restricted by an implied duty of good faith in favor of the re-maindermen, and is thus not “fully exercisable in her own favor.”

The nature of the interests created by the will is of course to be determined under Connecticut law. Treas. Reg. § 20.2056(b)-5(e) (1964). A relatively recent case in the Supreme Court of Errors of Connecticut, the highest court of that state, dealt with the consequences of a clause closely similar to Article Second of the instant will, giving a life tenant apparent power to demand payment of the principal. Connecticut Bank and Trust Co. v. Lyman, 148 Conn. 273, 170 A. 2d 130 (1961).

The trust in that case provided for a life interest in the settlor, then to his wife for her life, the trust to terminate on the death of the survivor and “the property constituting the same” to be distributed to the settlor’s issue, per stirpes, and in default of issue to designated institutions. The clause in question permitted payments of principal by the trustee for the benefit of the widow as life tenant, on the widow’s need or “at the written request” of the widow, as follows (148 Conn, at 276-77,170 A. 2d at 132) :

* * * after the death of the * * * [settlor], payments of principal shall be made to or for the benefit of said Katharine K. Lyman either on the judgment of the Trustee as to their being needed because of her illness or absence or other emergency, or at the written request of said Katharine Ii. Lyman or for both of said reasons.

Soon after the death of the settlor, the widow presented a written request that the entire principal be paid to her forthwith. The trustee petitioned for instructions. On behalf of the remaindermen, it was claimed that while the widow could by a series of requests based on reasonable justification exhaust the principal, she could not do so without a showing of need or other justification.

The court held the will to express a dual intention with respect to invasion of the principal — the first, to allow the trustee on its own initiative to pay over principal on the basis of need, particularly useful in case the beneficiary were so disabled as to impair her judgment, and the second to order the trustee to pay over principal “at the untrammeled, written request of the beneficiary” (148 Conn, at 280, 170 A. 2d at 133).

The widow as life income-beneficiary, the holder of an equitable and not a legal estate, was held neither an actual nor quasi trustee for the remaindermen. The presence of a remainder clause, the court said, was no indication of an intention to circumscribe an otherwise apparently unbridled power of invasion, and was at most an indication of the expectations of the settlor as to the use the widow would make of the unrestricted power of invasion.

While standards for a limitation on the exercise of the power of an income beneficiary to invade were, the court said, doubtless enforceable, the power to invade had been given unconditionally and would not be restrained (148 Conn. at 280-81, 170 A. 2d at 133-134):

* * * Here, the power of withdrawal or invasion is general and unlimited, and is neither expressly, nor by implication, given for the beneficiary’s support, comfortable maintenance or need, or for any similar purpose which would call for the exercise of a reasonable discretion in conformance with expressed, or necessarily implied, standards, purposes or limitations. See, for instance, Little v. Geer, 69 Conn. 411, 415, 37 A. 1056. Courts will, of course, protect against an abuse of discretion in any equitable matter. Conway v. Emeny, 139 Conn. 612, 619, 96 A. 2d 221. Here, however, no discretion is involved. The power to request payments of principal is neither based on, nor does it call for, the exercise of discretion in conformance with any standards, purposes or limitations, express or implied. The right to invade is left to the defendant’s desires.

This Connecticut decision is conclusive on the nature of the right of the widow under Article Second of the instant will, which gives the widow “the right, in her absolute discretion, to use such amounts out of the principal of said ‘Trust Fund A’ as she may request at any time and from time to time, without restriction.” She is not to be limited, in the exercise of her rights, by any duty to the remaindermen. No conditions having been imposed on “her absolute discretion,” she is entitled under the Lyman case to request payment to her of any or all of the corpus at any time. As the court said, “The right to invade is left to [the widow’s] desires.”

The power is thus “an unlimited power to invade” and is “fully exercisable hi her own favor” under § 2056 (b) -5 (g) (i) of the regulations, note 5, supra.

Left for decision is another contention of the Government — that the trustee has the power in certain circumstances to pay out corpus for the benefit of decedent’s children. This argument is based upon Article Fourth of the will, set out in the note⁶ which gave the trustee discretionary power to use the portions of the principal deemed necessary to meet any emergency, illness or other similar situation “necessitating any unexpected need of cash for any beneficiary or any respective share herein created.”

The trustees’ power is under Article Fourth exercisable “[d]uring the continuance of the Trusts” in case of need of “any beneficiary or any respective share herein created.” These words of course include the remaindermen, the decedent’s children. Article Second provided that on the death of the widow, the balance in Trust Fund A was to be paid into Trust Fund B, where, the life income-beneficiary (the widow) of Trust Fund B then being dead, the decedent’s children would take the income of Trust Fund B and be entitled to receive distributions of % of their respective shares of corpus at the ages of 25,30 and 40.

The clause is quite clear, and the clarity makes it unnecessary to consider the contention, made with citation of Virginia National Bank v. United States, 443 F. 2d 1030 (4th Cir. 1971), that patent ambiguity permits a resort to parol evidence, outside the will, to show the intent of the testator.

Until the widow dies or draws down the entire Trust Fund A by her demands (as permitted by Article Second as heretofore construed), the children remain permissible objects of the trustees’ discretionary powers to invade under Article Fourth and devote to the use of the children any part of the principal of Trust Fund A deemed necessary for the children’s “unexpected need of cash” by reason of an emergency, illness or similar situation. The possibility that the widow can deplete Trust Fund A, end the trust and thereby destroy the remainders does not affect the continued existence of those remainders in the interim.

While the Connecticut court in Lyman did not have before it a clause authorizing invasion for the benefit of remaindermen, it did have occasion to comment on the remainders in the will before it, in terms which are relevant presently. In discussing the effect of the life estate on the remainders, the court stated (citing 2 Scott on Trusts (2d ed.) p. 952) that while the remainder might amount to little or nothing through exercise of the wholly unlimited power of the widow to invade, the gift over was not invalidated. The trust, defendant conceded, “would persist so long as any of the principal remained and would operate to give any principal remaining at bier death to the remaindermen.” 148 Conn, at 280, 170 A. 2d at 133. Lyman confirms that the remainders to the children, here, continue though the widow may at any time demand payment of all the principal.

The validity of the remainders, and the power of the trustee to pay part of the principal to the children, means that the trustee could in some circumstances “appoint a part of the interest to any person other than the surviving spouse” (Regulations, note 5, supra), and thus that in the words of § 2056 (b) (5) (note 3, supra), there is a “power in any other person to appoint any part of the interest * * * to any person other than the surviving spouse.” Therefore, the widow’s rights are not exclusive under § 2056 (b)-5, and the interest to her therefore does not qualify under § 2056(a) for the marital deduction.

The several issues having been decided against the plaintiff, the petition should be dismissed.

FINDINGS oe Fact

1. Decedent, Eugene F. McCabe, a citizen of the United States, died testate on August 23, 1964. The administrator with the will annexed, the Westport Bank and Trust Company, Westport, Connecticut, was appointed by the Connecticut Court of Probate on October 22, 1964.

2. On or about November 5, 1965, the estate of decedent timely filed an estate tax return on Form 706.

3. On or about October 20, 1966, the Internal Revenue Service addressed to plaintiff a 30-day letter making adjustments which increased the net tax payable from $14,535.20 to $40,055.52, or by $25,520.32, as follows:

(a) Increased the value of jointly held property on Schedule E of Form 706 (Estate Tax Return) by $7,000, from $57,500 to $64,500. (On November 24, 1964, about 3 months after decedent’s death, two appraisers appointed by the probate court, Mrs. Franz Mohr and Mr. Walter W. Bassett, appraised decedent’s jointly owned residence located at 2 Cedar Road, Wilton, Connecticut, at $57,500, made up of $14,500 for the land and $43,000 for the building.)

(b) Increased the amount of trust property to be included in Schedule G of Form 706 by $18,298.66. (This property represented a Pennsylvania inter vivos trust established on May 16, 1940 by the decedent. The examiner found that such trust property should be included in the gross estate either as a transfer with retained life estate (under section 2086 of the Internal Revenue Code of 1954) or as a revocable transfer (under section 2038 of the Code).)

(c) Disallowed $54,599.61 of the marital deduction claimed on Schedule M of Form 706. (The examiner found that the marital deduction “was overstated to the extent of $54,599.61 for the reason that the power of appointment in the decedent’s surviving spouse (under Article Second of his will) is not exercisable in favor of herself or her estate and exercisable alone and in all events.”)

(d) Disallowed a $12,000 widow’s allowance claimed as an administrative expense on Schedule J of Form 706. (This item was an allowance to the widow of $1,000 per month for the 12 months following the decedent’s death, pursuant to an order of November 30, 1964 by the Court of Probate.)

4. Plaintiff filed with the District Director a “Protest and Application to Increase Schedule J Deductions,” dated November 2, 1966, objecting to the following adjustments which had been made in the 30-day letter:

(1) Increase of $18,298.66 in the amount of trust property to be included on Schedule G of the return. This adjustment, according to the protest, concerned the inclusion in the gross estate of part of the corpus of the 1940 inter vivos trust.

(2) Disallowance of $54,599.61 taken as a marital deduction on Schedule M of the return. This adjustment, according to the protest, concerned the power of decedent’s widow to exercise a power of appointment in her own favor at any time.

5. On March 9, 1967, the estate filed with the Internal Revenue Service a supplemental brief citing authorities deemed by it to support the objections it had made in the protest dated November 2, 1966. The brief was divided into two parts, each part discussing one of the two protested adjustments described in the preceding finding.

8. On September 18, 1968, the adjustments made by the District Director were affirmed by the Appellate Division of the Internal Revenue Service in a 90-day letter to plaintiff giving notice of a deficiency in the amount of $25,520.32. The letter stated in part as follows:

Estate oe Eugene F. McCabe

The Westport Bank and Trust Company, Administrator C.T.A.

East State Street, Westport, Oonneetimt 06680

Date of Death: August 23,1964.

It is determined that the value of certain trust property should be included in the gross estate either as a transfer with retained life estate (under section 2036 of the Internal Revenue Code) or as a revocable transfer (under section 2038 of the Internal Revenue Code). Accordingly, the taxable estate of the decedent is increased in the amount of $18,298.66.

It is determined that the amount of the marital deduction claimed was overstated to the extent of $54,599.61, for the reason that the power of appointment in the decedent’s surviving spouse (under Article Second of his will) is not exercisable in favor of herself or her estate and exercisable alone and in all events.

*****

Schedule 1. — Adjustments to Taxable Estate

Taxable estate per ¡return-$79,100. 00

Increases in taxable estate and decreases in deductions:

(a) Schedule G, Transfers- 18,298.66

(b) Schedule M, Marital deduction_ 54, 599. 61

(e) Schedule E, Jointly-owned property_ 7, 000. 00

(d) Schedule J, Administration expenses_ 12, 000.00

91, 898.27

Taxable estate as adjusted- 170,998.27

Schedule 1-A. — Explanation of Adjustments

(a)Schedule G, Transfers-$18,298.66

(1>) Schedule M, Marital deduction- 54, 599. 61

See introductory paragraphs of this statement for adjustments (a) and (b)

(c) Schedule B, Jointly-owned property- 7, 000. 00

It is determined that this adjustment reflects the fair market value of the property.

(d) Schedule J, Administration expenses- 12,000. 00

It is determined that the widow’s allowance is disallowed since it is not a proper administration expense.

Schedule 2, — Computation of Tax

Taxable estate as adjusted, schedule 1- 170, 998.27

Gross estate tax- 41, 999. 48

Credit for state death taxes- 1, 943. 96

Gross estate tax less credit for state death taxes- 40,055. 52

Net estate tax payable- 40,055.52

Estate tax assessed per return, D.L.N. DT7738- 14, 535.20

Deficiency in estate tax- 25, 520. 32

7. On or about January 17, 1969, the District Director assessed an estate tax deficiency of $25,520.32 plus $4,826.13 interest, a total of $30,346.45, which was paid by the estate on January 29,1969.

8. On October 2, 1969 plaintiff filed with the District Director a claim for refund of $30,346.45. The claim stated that

The Commissioner:

(a) erroneously included assets in the gross estate of an intervivos trust over which the decedent did not retain the life estate or power to alter or amend_$18,296. 66

(b) disallowed a portion of the marital deduction over which the decedent’s spouse had an unlimited power to invade the corpus of her trust- 54, 599.61

(c) erroneously increased the value of the decedent’s private residence, a jointly owned asset_ 7, 000. 00

Claimant reserves the right to claim additional attorneys’ fees and expenses as a result of litigation in the event this claim is denied.

9. (a) On October 15, 1969, the claim for refund of tax deficiency paid was disallowed in full by an Internal Revenue Examiner.

(b) On October 31, 1969, plaintiff duly executed and filed Internal Revenue Service Forms 2297 (Waiver of Statutory Notification of Claims Disallowance) and 3363 (Acceptance of Proposed Disallowance of Claim for Refund or Credit).

(c) On November 10, 1969, the aforesaid disallowance of the claim for refund was affirmed by the District Director of Internal Revenue.

10. Paragraph 3 of plaintiff’s petition in this court alleges that the Internal Revenue Service increased the estate tax “from $14,535.20 to $40,055.52 or by $25,520.32” and that “[t]he additional amount was derived from” three allegedly arbitrary increases and disallowances. These increases and disallowances, described in the petition, correspond to the first three of the four adjustments in the 30-day letter (finding 3, supra) and to the three quoted allegations of error in the claim for refund (finding 8, supra). The petition further alleges (paragraph 4) that the District Director assessed a deficiency of $25,520.32 plus $4,826.13 interest, a total of $30,346.45, which was paid.

Further, that:

“5. Plaintiff contends that the District Director erroneously disallowed property which qualified for the marital deduction, thus increasing the gross estate by $54,599.00; that the District Director erroneously disallowed the exclusion from the gross estate of a Pennsylvania inter vivos trust of $18,298.00; and erroneously and arbitrarily increased the valuation of decedent’s residence by $7,000.00 over the appraisal by Court appointed appraisers who appraised the real estate at date of death at $57,500.00.

* * * * *

“7. Plaintiff estate is justly entitled to a refund of $30,346.45 together with interest, representing the additional U.S. Estate Tax erroneously assessed by, and paid to, the Internal Revenue Service.”

Finally, the petition prays for judgment in the sum of $30,346.45 “together with interest as provided by law”.

11. Plaintiff is the sole and absolute owner of the claim presented and no assignment or transfer of the claim or any part thereof or interest thereon has been made. No other action has been taken on this claim by the Congress or another court or by any department or agency of the Government other than as stated.

The Valuation of the Residence

12. On the issue of valuation of the residence, valued by the Commissioner of Internal Revenue at $64,600, plaintiff offered the expert testimony of Mr. Walter W. Bassett and Mrs. Franz Mohr, who testified in support of their earlier valuation, in the estate tax return, of $57,500.

13. The subject property is a 6.8 acre plot, approximately 1,000 feet deep, with a 300-foot frontage, at 2 Cedar Road, Wilton, Connecticut. The land slopes gently downward from Cedar Road to the east; the front two-thirds of the land is cleared and the rear third is wooded.

14. The property is located in one of the most desirable residential areas of Wilton, within a mile of Westport, and it is well within commuting distance to New York City via the Penn Central System.

15. Mr. Bassett has 5 years of experience as an appraiser for the Fairfield County Trust Company.

16. Mrs. Mohr has never been employed or formally trained as an appraiser. Her experience has been limited to accompanying her former employers when they made appraisals of various properties. She had not been involved in the real estate business for at least 5 years prior to the appraisal of the instant property she made with Mr. Bassett.

17. Mr. Bassett and Mrs. Mohr, who were not earlier acquainted, met at the site on the day of appraisal.

Mr. Bassett estimated that it took him an hour, spent at the site, to complete the work for his part in the joint appraisal.

Mrs. Mohr took approximately 3 to 4 hours for her part in the appraisal. One to 2 hours were spent looking over the records available at the town assessor’s office at the town hall, and 1 to 2 hours were spent at the property on the day of the appraisal.

18. Mr. Bassett prepared no written report for his part in the appraisal.

Any written report that might have been prepared by Mrs. Mohr at the time of appraisal of the subject property was unavailable at the time of trial.

19. Mrs. Mohr and Mr. Bassett recognized that zoning ordinances (which require 2-acre lots for a residence) might permit the subdivision of the subject property, consisting of 6.8 acres. They did not check or did not recall checking the legal requirements for subdividing property. While they considered that the property might be more valuable if subdivided, they gave no effect to possible subdivision because they felt it would have an adverse effect on the value of the main house and front acreage.

20. Mr. Bassett and Mrs. Mohr either did not check or did not recall checking other sales of improved or unimproved property in the vicinity of the property under appraisal. Mr. Bassett testified that he did not recall investigating whether or not other parcels of land in the area had been subdivided and that he did not assign a per acre value to the land or utilize the cost method of valuing existing improvements. When Mrs. Mohr was asked whether she used the cost method, she replied “I can’t answer that.”

21. Mr. Bassett testified that he and Mrs. Mohr “may have been a little careless” -in their allocation of the appraised valuation between land and improvements ($14,500 for the land and $48,000 for the buildings), but that their valuation of $57,500 “represented a fair price regardless of how you want to slice it as to land and buildings.”

22. Defendant’s expert witness on valuation was Mr. Harry Leister. He testified to a valuation of $67,000 ($2,-500 more than the valuation by the Internal Revenue Service).

23. Mr. Leister was at the time of trial primarily employed as a real estate appraiser. He had been involved in real estate appraising for the prior 8 years. Before that he had divided his employment time between real estate brokerage, residential building and airplane piloting. He had resided in Wilton for 25 years prior to the trial.

24. Mr. Leister is a licensed real estate broker; Connecticut does not license real estate appraisers. He is presently a candidate for membership in the American Institute of Real Estate Appraisers. He has taken four courses from the Institute and has attended numerous seminars sponsored by the Society of Real Estate Appraisers and the Right of Way Association. He has had extensive experience appraising houses for corporations, and has worked with numerous attorneys in condemnation matters. He has served as a member of the Wilton Board of Tax Review for 8 years, three of those as its chairman. The Board reviews claims for adjustments in personal and real property assessments.

25. Mr. Leister’s appraisal of $67,000 was based upon: (1) an investigation of sales of improved and unimproved property in the vicinity of the subject property (the direct market comparison approach); (2) an examination of the property itself; (3) a utilization of the cost approach to the valuation of improvements; (4) an investigation of the zoning and subdivision regulations and requirements governing the property in question; and (5) an examination of pertinent records available at the town hall in Wilton. The appraisal, dated September 21,1971, contains 12 typewritten pages and several exhibits. It took 10-15 hours to prepare.

26. In his physical examination of the subject property, Mr. Leister observed the improvements and prepared a construction checklist thereof, prepared floor plan sketches, took room measurements, walked the front portion of the property, and photographed the premises.

27. Mr. Leister’s examination of Wilton town tax records disclosed that the assessed valuation of the property for 1964 was: (a) dwelling, $28,150; (b) land, $8,140; (c) detached garage, $960; for a total of $37,250. These figures were based upon an evaluation of the property made by the town’s assessor in 1959. Property in Wilton is reassessed every 10 years. The assessed valuation is based upon 60 percent of the market value at the time of assessment. Thus, according to the assessor’s figures, the market value in 1959 would have been $62,083 ($37,250=60 percent of X; X=$62,083).

28. Mr. Leister valued the land portion of the McCabe property at $17,500. The valuation was based upon the supposition of a subdivision of the 6.8 acre property into three lots of at least 2 acres each. The property is and was at the date of decedent’s death zoned K-2 (2-acre residence), which would permit subdivision into three conforming lots.

29. Subdivision of the property could be accomplished by allowing approximately 2.8 acres for the front portion of the property with the improvements on it, on Cedar Boad, and by dividing the rear portion into two 2-acre lots (or the .8 acre excess over the minimum, three 2-acre lots could be allocated in some other fashion among the three lots). The two 2-acre rear parcels would be served by a 50-foot common access strip or by two 25-foot individual access strips along tbe southern edge of the property. The acreage in such 25-foot access strips is considered part of the lot served for purposes of the zoning regulation.

Mr. Leister was familiar with and had personally subdivided properties in Wilton with 25-foot access strips to the back lots. He testified that subdivisions of this nature were fairly common practice in Wilton.

30. In valuing the land, Mr. Leister had studied sales of three unimproved properties in the vicinity of the McCabe property. One of the sales was adjacent to the McCabe property. Each of the three sales took place within 6 months of decedent’s death.

31. The three parcels sold were 2, 2.05, and 2.57 acres, respectively, and the sales prices were $7,500, $8,500, and $6,000, respectively. The second of these sales was of the property adjacent to the McCabe property.

32. The first of these unimproved properties was slightly inferior to the front 2 acres of the McCabe property; the second was equivalent to the front 2 acres of the McCabe property ; and the third was inferior to the front 2 acres of the McCabe property, as it was located well below road level and contained some swamp area.

33. Mr. Leister’s valuation of the land in the instant parcel was $17,500, composed as follows. He valued the front 2-acre portion of the property at $7,500, the second 2-acre portion at $6,000, and the third 2-acre portion at $4,000. These values were determined after making adjustments for: (1) survey costs; (2) time required for subdivision approval; (3) the effect of the driveway and rear lots on the front lot; (4) the effect of the back two lots being rear lots; and (5) the effect of the driveway on the back two lots.

34. In arriving at his total valuation of the property with improvements, Mr. Leister employed two methods, each approach utilizing adjustments involving the $17,500 figure arrived at (preceding finding) for the value of the 6.8 acres of land alone. The first, known as the direct market comparison approach, took into consideration sales of other residences. The second, known as the cost method, took account of the costs involved in replacing the existing (McCabe) structures.

35. In connection with the direct market approach, Mr. Leister investigated three sales of improved property in the vicinity of the McCabe property. He was familiar with the condition of each of these three properties in 1964, the year of decedent’s death. Each was sold within approximately 9 months of Mr. McCabe’s death.

36. There were no improved property sales involving approximately 6-acre parcels. Mr. Leister adjusted the sales prices of each improved lot accordingly, to arrive at a value for the improvements on a 2-acre lot. Further adjustments were made for improvements existing on comparison properties, but not on the McCabe lot. The sum of $10,000 was then added to the value of each of these three improved lots to account for the McCabe property’s additional 4 acres. The comparable values thus obtained were $71,500, $66,500, and $67,500. Mr. Leister testified that under this approach $67,000 was the value of the subject property. He based this figure primarily on the actual sales price of the second improved lot, to which only three adjustments had been made:

(1) an addition of $10,000 for an additional 1,000 square feet of living area (at $10 per square foot) in the improvements to the subject property; (2) a deduction of $3,000 to account for a basement family room which was not present in the subject property; and (3) an addition of $10,000 to account for the four back acres of the subject property. The witness’ reasoning does not explicitly account for the excess of .8 acre over his hypothetical three 2-acre lots, but it may fairly be inferred that his total valuation is based on the actual size, 6.8 acres, of the McCabe lot.

37. In connection with the second, cost approach, Mr. Leister used the Marshall and Swift Cost Service, a cost service which maintains building cost records on a nationwide basis. A current replacement cost may be determined for a given set of improvements by employing the Marshall and Swift manual. An adjustment factor, computed by Marshall and Swift, can then be applied to the current replacement cost to arrive at an undepreciated replacement cost. An adjustment for depreciation is then made, resulting in a 1964 depreciated replacement cost. The application of the foregoing process to the subject structure resulted, he testified, in a 1964 depreciated replacement cost of $49,848 for the McCabe improvements. Adding $17,500 for the value of the land, the total value of land and improvements under this approach amounts to $67,348.

38. To recapitulate, Mr. Leister testified that in his opinion the land, on the basis of subdivision, had a value of $17,500, and the improvements, on the basis of cost-reproduction, had a value of $49,848 or a total of $67,348, and that the land with the improvements had a value of $67,000, on the direct market comparison (comparable sales) basis.

The Inter Vivos Trust

39. By indenture dated May 16,1940, the decedent created a trust to which he assigned certain insurance policies on his life, having a total face value of $75,000, and on May 26, 1943 his wife assigned to said trust certain stock worth $6,300. The trustees under the indenture were Bussell J. Hopkins, president of the Titusville Trust Company of Titusville, Pennsylvania, and the Trust Company.

40. That indenture provided that the income should go to decedent’s wife for life, remainder to the children, and further provided that the trust was to be “irrevocable.”

In pertinent part, the indenture further provided as follows:

Second: To invest and re-invest funds coming into their possession in such securities as they may deem proper and suitable for the investment of trust funds,

* * * t. * *

Fifth: In the event of illness or emergency, should the income not be sufficient to provide proper care and comfort for the Donor’s wife, Dorothy M. McCabe, the Trustees are hereby directed to use so much of the principal of the trust fund as in their judgment may be necessary to properly care for the aforesaid Dorothy M. McCabe. Also, should any of the Donor’s children desire a college or higher education, and the income from the trust be not sufficient to provide such education, the Trustees are authorized, upon the written consent of the Donor’s wife, Dorothy M. McCabe, to use so much, of the principal as in their opinion may be needed for such educational purposes. And should Dorothy M. McCabe be not living, then the Trustees may use so much of the principal of the_ trust fund as in their opinion is necessary and expedient for the education of the Donor’s children.

% * * * *

Ninth: * * *

The Donor understands and agrees that the trust shall be operative only with respect to the proceeds of such policies of insurance as may be due and payable in the event of his death, after the deduction of all charges against said policies by way of advances, loans, or otherwise, either in favor of the Trustees or the insured.

# * & * *

Twelfth: The Donor has the right to substitute for Titusville Trust Company and Bussell J. Hopkins, as Trustees, anyone whom he desires, except, however, that such substitution of appointment cannot be made during any time in which he has indebtedness to the within named Titusville Trust Company.

41. Substantially all of the dealings concerning the trust took place between the decedent and the individual trustee, Mr. Hopkins. For all practical purposes, Mr. Hopkins was both the individual and the corporate trustee.

42. Mr. Hopkins was a close friend of decedent’s father. Decedent’s own social relationship with Mr. Hopkins later developed into a business relationship.

43. At trial, decedent’s wife could not recall ever having seen the 1940 trust agreement, nor could she recall that her husband had ever explained its terms to her. She was certain that no one at the Trust Company had ever explained the provisions of the agreement to her.

44. Decedent had four children, Eugene F. McCabe, Jr., 44 years old at the time of trial, Dorothy Patricia McCabe, Janet Newman, and Catherine Concaimon.

45. None of decedent’s children was made aware of the 1940 trust agreement except through informal family conversations. They were only in general, unspecific terms aware of the nature and amount of the trust assets, the nature of their respective interests, the identity of the trustees, the surrender of the life insurance policies, and the amounts withdrawn from the trust. They were never consulted with regard to any of the transactions regarding the trust. No evidence was presented which would show that any of them received money from their parents or from the trust for support, medical assistance or education during the period 1959-1964 (a period which is the subject of findings which follow).

46. Prior to his retirement in 1959, decedent was vice president in charge of sales of the Tidewater Associated Oil Company where he had been employed for 87 years. His salary of $30,000 ceased on his retirement. He continued with his employer as a consultant, at a compensation which does not appear.

47. No distributions from the trust corpus were requested or made prior to decedent’s retirement in 1959, or subsequent to decedent’s death on August 23, 1964.

48. Upon decedent’s retirement, the cash surrender value of all insurance policies in the trust, a total of $56,917.44, was taken by the trust. This action was taken pursuant to the mutual agreement of decedent, decedent’s wife, and the trustees.

49. The following summarizes the disposition of cash in the trust from January 31,1959 to February 11,1963:

50.Two of the written requests (or one written request and one written authorization) for distributions from the trust mentioned in the foregoing finding were prepared for his wife’s signature by decedent, and each by their terms directed that the resultant funds be deposited in his checking account. Two additional written requests for distributions were prepared for his wife’s signature by decedent. Unlike the previous two requests, they did not, by their terms, direct that the resultant funds be deposited in his checking account. By stipulation, however, the parties agreed that the resultant additional two deposits to decedent’s checking account, mentioned in the foregoing finding, were made at the request of Mrs. McCabe.

51. The moneys deposited to the checking account of E. F. McCabe, as set forth in the finding next before last, were applied to the joint and personal use and benefit of E. F. McCabe and Dorothy McCabe, including the costs of personal vacations and children’s weddings. (Janet Newman, their daughter, was married in 1959.)

52. The value of the assets of the 1940 trust as of the date of decedent’s death, excluding the value of any assets in the trust which had been contributed by his wife, was $18,298.66.

53. Note : This finding and following findings quote letters in the record with respect to transactions in the foregoing findings.

A letter of January 14, 1959, from the decedent to Mr. Hopkins, the individual trustee, reads as follows:

DeaR Bussell : I too am surprised at the contents of the Northwestern Insurance Company’s letter. I think we should be guided by the opinion of the bank’s attorney. After all, what we are doing in this instance, as I see it, is substituting for the life insurance policies in the trust other securities and, furthermore, since there is an indebtedness to the bank, we are using this means of eliminating said indebtedness.

I, frankly, don’t see how they can refuse to honor the request for the cash value of the policy when the request is made by both the donor and the bank as trustee.

Sincerely,

JS/ Gene.

54.A letter dated April 10, 1959, from Mr. Hopkins to the decedent reads as follows:

DeaR Gene : Enclosed is a complete statement of the cash received from your various life insurance policies. The Massachusetts Mutual policy 1,570,761 apparently has never been in our possession, and the only other exception is the Massachusetts Mutual policy BA 2226706 which, we have but was not listed on your summary.

You mentioned in your letter the Sunray stock, of which we hold in the trust 423 shares, and inasmuch as the trust is irrevocable we believe the dividend should continue to come here. However, Dorothy, being the beneficiary, can instruct us to remit the dividends to you and herself jointly.

Also, in respect to the cash remaining in your account, we can as you suggest purchase securities from you or purchases can be made through the broker. The trust agreement states clearly that the income shall be paid in quarterly installments to the wife of the donor during her lifetime with provision thereafter for payment of income and eventual distribution of the principal. As previously suggested, we should have a letter from Dorothy authorizing the $3,000 transfer to your checking account.

Trust the life insurance figures agree with your records, and if you need any further information do not hesitate to write us.

Sincerely,

PRESIDENT.

55. A letter of April 17, 1959, from the decedent to Mr. Hopkins reads as follows:

DeaR Bussell : Thank you for your letter of April 10 to Which you attached a summary of the insurance monies received by the bank.

With reference to Massachusetts Mutual Policy No. 1,570,761,1 can’t account for its whereabouts; I thought it was in the bank with the other policies.

In accordance with suggestion of Agent John P. Jan-notta of Massachusetts Mutual, I attached to my letter addressed to you on January 14 a letter to the Massachusetts Mutual asking them to issue a duplicate policy and to deliver the cash surrender value to the Titus-ville Trust Company. I quote the letter:

“I desire to take the cash value of policy 1,570,761. However, the policy has been lost. Will you, therefore, please issue duplicate policy and send the cash surrender form to the Titusville Trust Company.”

I assumed that you had forwarded that letter along with the other policy. If you did not send the letter and do not have it in your files, I shall write another letter.

With respect to the cash in the Trust Fund, I desire to substitute for the cash, securities in a like or greater amount. You suggested purchasing the securities, which I don’t think is tbe way to approach, the matter as I certainly don’t want to pay capital gain tax to achieve this objective.

You agreed with me sometime ago that the corpus of the trust could be changed without interfering with the irrevocable feature of the agreement; therefore why would it not be a simple matter for me to forward you the securities and then release the cash to me. I could send any number of securities but suggest—

170 shares Atcheson, Topeka and Santa Fe

150 shares Texas Company

400 shares St. Regis Paper

which would represent roughly $35,000 value today as against the $21,000 cash you are holding. Obviously we want the dividends from the securities and I am attaching letter from Dorothy, the beneficiary of the trust, requesting you to remit the dividends on Sunray stock now in the trust as well as the dividends on any other stock which are made a part of the trust.

In addition, you will note that Dorothy has authorized the transfer of $3,000 from the trust to my checking account.

Please advise if the plan suggested herein is agreeable to the bank.

Very truly yours,

/S/ E. F. McCabe

E. F. McCabe.

EFM B

P.S. — We have an invoice covering the safe deposit box for period of one year from April 26. Frankly, I don’t believe there is anything in the box except 60 shares of National Air Line stock and maybe the group life insurance policy. If this is the case, would suggest that the policy be held in the trust fund and the stock be forwarded to Dorothy.

/S/ E. F. M.

EUGENE.

56. Enclosed with the letter quoted in the preceding finding, was a letter dated April 17,1959 from decedent’s wife to Mr. Hopkins, reading as follows:

Dear Mr. HorkiNS : As the beneficiary of the irrevocable trust established by my husband, E. F. McCabe, I respectfully request that the dividends on any stocks now held in the trust or which may later be added to the trust be remitted to me in care of the Westport Bank and Trust Company, Westport, Conn.

I should also like to authorize you to transfer $3,000 from the trust fund to my husband’s checking account.

Very truly yours,

/S/ Dorothy M. McCabe

Dorothy M. McCabe.

57. A letter of June 9,1959 from Joseph J. Harding, Esq., an attorney, to Mr. Hopkins reads as follows:

Re: Insurance Trust Agreement of Eugene F. McCabe of Wilston [sic], Conn.

Gentlemen : Mr. Eugene F. McCabe has consulted me regarding the Trust Agreement which he entered into covering his life insurance with your Bank as Trustee, and subsequently amended on May 6th, 1940.

I understand that Mr. McCabe has had some communication with you regarding the possibility of his voluntarily revoking the instrument which, by its terms, is irrevocable.

Naturally, I am not cognizant of the provisions 'applicable thereto under the Pennsylvania Law, but I presume, as in most jurisdictions, some provision by statute is made permitting said revocation. Under the laws of the State of New York, upon the written consent of all persons beneficially interested in a trust in personal property, the donor or creator may revoke the same as to whole or such part thereof, and thereupon the estate of the trustee shall cease in whole or such part thereof.

I presume that you have discussed this with your counsel and, if the foregoing provisions of law are similar in Pennsylvania, Mr. McCabe is in a position to have the written consent of all persons named in said instrument served upon you.

I would appreciate your informing me whether or not the same will be sufficient to effect his purpose.

Very truly yours

/S/ Joseph J. Harding.

58. A letter of June 12, 1959, from Mr. Hopkins to the decedent, reads as follows:

Dear Gehe: Enjoyed talking with you today and Bache & Company, our broker, gave us a quotation on Mission Development of $24.00 to $24.50. We have entered an order to purchase 800 shares for the account of the trust.

I talked with our attorney relative to revoking the trust and he is of the opinion that while there might be some difficulty nevertheless it could probably be done providing all interested parties, direct and contingent, were of legal age, competent, etc. You mentioned this morning that it would not be necessary for us to reply to Attorney Harding’s letter so you might pass along this information to him.

I do hope you can arrange to be in this vicinity during the week of August 23. Reservations apparently are tight, but if you wish I shall be glad to talk with the Housing Committee, obtaining some suitable place for you. Best wishes to you and Dorothy.

Sincerely,

PRESIDENT.

59. A letter of January 11,1960, from Mr. Hopkins to the decedent, reads as follows:

Dear Gene: Received your letter of January 6 and we have approximately $3,000 in cash in the trust, the balance having been invested in Mission Development.

In addition to the Mission stock we also have the Prudential-Tidewater policies which may or may not have any value after your retirement. The policies do contain reference to retirement and, as we understand it, are still in force providing you are receiving a pension and are paying the premiums. You might advise us on this point.

The clause relative to any indebtedness here reads as follows:

“The trust shall be operative only with respect to the proceeds of such policies of insurance as may be due and payable in the event of his death, after the deduction of all charges against said policies by way of advances, loans, or otherwise, either in favor of the Trustees or the insured.”

If your Prudential-Tidewater policies are still in force, we could extend a loan of $15,000 based on the above clause. We presume if the policies are not in force the loan could be extended against the value of the Mission Development stock, although in this latter instance we probably should have our counsel give us a legal opinion determining whether or not we can advance funds to you against the trust assets other than life insurance.

It would appear that if your children are all of legal age they could join with you and Dorothy in requesting and obtaining a cancellation of the trust and a return to you of the cash and securities. Possibly, for immediate use, a request for the uninvested cash would take care of you,

Shall await your further advice, and every begfc wish to all of you for the coming year.

Sincerely,

PRESIDENT.

60. A letter of August 26, 1960, from the decedent’s wife to the trustees reads as follows:

Titusville Trust Company and Russell J. Hopkins, Trustees

Under Trust Agreement Entered into on May 16,1940 with Eugene F. McCabe

Titusville Trust Company of Titusville, Pennsylvania and Russell J. Hopkins are trustees under a trust agreement with Eugene F. McCabe dated May 16,1940, which provides in brief that they as trustees hold certain policies of life insurance on the donor together with additional cash and securities. The assets in the trust, exclusive of the life insurance policies, now being:

Cash, $8,163.08 _

_ 800 snares Mission Development

423 shares Sunray Oil.

The trust agreement is irrevocable, one of the provisions being that the income from the trust is to be paid in quarterly installments to the wife of the Donor, Dorothy M. McCabe, during her lifetime and in the event of her death the income is to be paid to the children of the donor with proper provision for succession. The trust also provides that in the event of illness or emergency the trustees are authorized to use as much of the principal of the trust fund as in their judgment may be necessary to properly care for Dorothy M. McCabe. Also, it provides that on the written consent of Dorothy M. McCabe the principal may be expended for college or higher education of any of the donor’s children.

In view of the rights and privileges granted to me under the above mentioned trust agreement, I now request that you permit me to withdraw from the trust the cash on hand, namely $3,163.08, depositing it in Titusville Trust Company to the credit of my husband Eugene F. McCabe. In consideration of so doing I hereby agree to protect and save the trustees harmless and free from any liability or any claim that may be made upon them by reason of releasing the above sum to me.

Very truly yours,

/S/ Dorothy M. McCabe.

61. A letter of April 25, 1961, from the decedent’s wife to the trustees, reads as follows:

Titusville Trust Company and Russell J. Hopkins, Trustees

Under Trust Agreement Entered into on May 16, 1940

With Eugene F. McCabe.

Titusville Trust Company of Titusville, Pennsylvania and Russell J. Hopkins are trustees under a trust agreement with Eugene F. McCabe dated May 16,1940, which provides in brief that they as trustees hold certain policies of life insurance on the donor together with additional cash and securities. The assets in the trust, exclusive of the life insurance policies, are:

800 shares Mission Development 423 shares Sunray Oil.

The trust agreement is irrevocable, one of the provisions being that the income from the trust is to be paid in quarterly installments to the wife of the Donor, Dorothy M. McCabe, during her lifetime and in the event of her death the income is to be paid to the children of the donor with proper provision for succession. The trust also provides that in the event of illness or emergency the trustees are authorized to use as much of the principal of the trust fund as in their judgment may be necessary to properly care for Dorothy M. McCabe. Also, it provides that on the written consent of Dorothy M. McCabe the principal may be expended for college or higher education of any of the donor’s children.

In view of the rights and privileges granted to me under the above-mentioned trust agreement, I now request that you sell 150 shares of Mission Development and remit $3,800 of the proceeds to me. In consideration of so doing I hereby agree to protect and save the trustees harmless and free from any liability or any claim that may be made upon them by reason of releasing the above sum to me.

Very truly yours,

/S/ Doeotht M. McCabe.

62. A letter of January 16,1963, from the decedent’s wife to the trustees, reads as follows:

Titusville Trust Company and Russell J. Hopkins, Trustees

under Trust Agreement entered into of May 16, 1940 with Eugene F. McCaibe

Titusville Trust Company of Titusville, Pennsylvania, and Russell J. Hopkins are trustees under a Trust Agreement with Eugene F. McCabe, dated May 16, 1940, which provides in 'brief that they as Trustees hold certain policies of life insurance on the Donor, together with additional cash and securities. The assets m the trust, exclusive of the life insurance policies, are:

423 shares Sunray DX Oil Company 650 shares Mission Development Company

The Trust Agreement is irrevocable, one of the provisions being that the income from the trust is to be paid in quarterly installments to the wife of the Donor, Dorothy M. McCabe, during her lifetime and in the event of her death the income is to be paid to the children of the Donor with proper provision for succession. The Trust also provides that in the event of illness or emergency the trustees are authorized to use as much of the principal of the trust fund as in their judgment may be necessary to properly care for Dorothy M. McCabe. Also, it provides that on the written consent of Dorothy M. McCabe, the principal may be expended for college or higher education of any of the Donor’s children.

In view of the rights and privileges granted to me under the above-mentioned Trust Agreement, I now request •that you sell 150 shares of Mission Development Company and remit the proceeds to me, less income tax, if any. In consideration of so doing, I hereby agree to protect and save the Trustees harmless and free from any liability or any claim that may be made upon them by reason of releasing the above sum to me.

Very truly yours,

/S/ Dorothy M. McCabe.

63. A letter of April 23, 1963, from the decedent and his wife to the Titusville Trust Company reads as follows:

GeNtlemeN : This letter is your authorization to sell from the E. F. McCabe trust account 500 shares of Mission Development, replacing this with 290 shares of Mission Corporation.

Very truly yours,

/S/ Dorothy M. McCabe.

/S/ EtjgeNe F. McCabe.

64. Article Second of decedent’s will, dated December 12, 1956, provides as follows:

Second: I give, devise and bequeath all of my property, real, personal and mixed, of every description and wherever the same may be situate and of which I may die seised or possessed, to the Titusville Trust 'Company, of Titusville, Pa., IN TRUST, NEVERTHELESS, for tte following purposes:

My said Trustee shall divide my said estate into two equal portions, designating one portion as “Trust Fund A” and the remaining portion as “Trust Fund B”.

From the said “Trust Fund A” my said Trustee shall pay the net income, in at least quarterly installments, to my wife, Dorothy M. McCabe, for and during her natural life, giving and granting, however, to my said wife, the right, in her absolute discretion, to use such amounts out of the principal of said “Trust Fund A” as she may request at any time and from time to time, without restriction. Any balance remaining in the said “Trust Fund A” at the time of her death shall be added to and become a part of “Trust Fund B”.

From “Trust Fund B” my said Trustee shall pay the income from the said Trust Fund, in at least quarterly installments, to my wife, Dorothy M. McCabe, for and during her natural life, and upon her death, or in the event she shall have predeceased me, to my children, in equal parts, share and share alike. Should any child or children of mine predecease me, the issue of such deceased child or children shall .receive the portion of income and principal its or their parent would have received if living. Should any child or children of mine leave no issue them surviving, then in that event, the proportionate share of such child or children shall revert to and become a part of the principal of said “Trust Fund B”, to be divided equally among my surviving children and/or the issue of my deceased child or children, if any.

As each of my children arrives at the age of twenty-five (25) years, such child shall receive one-third (ys) of its proportionate share of the said “Trust Fund B”.

As each of my children arrives at the age of thirty (30) years, such child shall receive one-third (y3) of its proportionate share of the said “Trust Fund B”.

As each child arrives at the age of forty (40) years, such child shall receive his or her remaining proportionate share of the said “Trust Fund B”.

In the event I should die without child or grandchild me surviving, I give, devise and bequeath all of my said “Trust Fund B” to my wife, Dorothy M. McCabe, absolutely, and in the event my said wife should also predecease me, it is my will that my property go to and be divided in accordance with the Intestate Laws of the State of Connecticut.

65. Article Fourth of decedent’s will in pertinent part provides as follows:

Fourth: During the continuance of the Trusts hereby created, and at the end thereof, for the purpose of making final distribution, the Trustee shall have and possess the following powers:

1. To meet any emergency, accident, sickness, surgical operation, prolonged illness, or any other similar situation which may arise, necessitating any unexpected need of cash for any beneficiary or any respective share herein created, the said Trustee is authorized to use such portions ox the principal of these Trust Estates as said Trustee, in its sole discretion, may deem necessary for such purposes, as the particular occasion demands.

Ultima™ Findings and Conclusions

66. The value for Federal estate tax purposes of the residence located at 2 Cedar Road, Wilton, Connecticut, as of August 23,1964, was not less than $64,500, the amount found by the Commissioner of Internal Revenue.

67. A prearrangement existed with respect to the 1940 inter vivos trust among decedent (the donor), the individual trustee (who also acted on behalf of the corporate trustee) and decedent’s wife (the donee). The arrangement was that the donor would retain the beneficial interest in the trust for his life and that the trustees and beneficiary would, at his request, take such formal steps as would be necessary to effectuate the donor’s retained interest. Accordingly, the corpus of the inter vivos trust contributed by decedent was transferred with a retained life interest within the meaning of § 2036(a) (1) of the 1954 Code and is therefore includible in the gross estate under that section.

68. The trustee of the trusts created by decedent’s will has the power to appoint a part of the interest in Trust Fund A to a person other than the surviving spouse and therefore, by the terms of § 2056(b) (5) of the 1954 Code, Trust Fund A does not qualify for the marital deduction under § 2056(a).

69. Plaintiff did not raise formally in its claim for refund, or otherwise to the Commissioner of Internal Revenue, an issue, as a ground for refund, of the propriety of the dis-allowance of the $12,000 widow’s allowance as a deduction from the gross estate, either as an administrative expense, a marital deduction, or otherwise.

•Conclusion op Law

Upon the foregoing opinion, findings of fact and ultimate findings and conclusions, which the court adopts and which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is not entitled to recover, and the petition is dismissed.

1 Among the provisions of the Instrument were:

“The Trustees shaU take receive and hold the policies of Insurance set forth In Schedule “A”, attached hereto and made a part hereof, together with instruments of assignment or change of beneficiaries upon said policies duly executed in duplicate, together with any other securities therein set forth and any poUcles or other securities which may from time to time be deposited with them under the terms of this Indenture, together with the proceeds of said insurance policies, IN TRUST NEVERTHELESS, for the foUowlng purposes and uses, and subject to the terms, conditions, powers and agreements as hereinafter set forth, namely:—

(Continued)

(Continued)

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“Second: To Invest and re-invest funds coming into their possession in such securities as they may deem proper and suitable for the investment of trust funds, * * *

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“Fifth: In the event of iUness or emergency, should the income not be sufficient to provide proper care and comfort for the Donor’s wife, Dorothy M. McCabe, the Trustees are hereby directed to use so much of the principal of the trust fund as in their judgment may be necessary to properly care for the aforesaid Dorothy M. McCabe. Also, should any of the Donor’s children desire a college or higher education, and the income from the trust be not sufficient to provide such education, the Trustees are authorized, upon the written consent of the Donor’s wife, Dorothy M. McCabe, to use so much of the principal as in their opinion may be needed for such educational purposes. And should Dorothy M. McCabe be not living, then the Trustees may use so much of the principal of the trust fund as in their opinion is necessary and expedient for the education of the Donor’s children.

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“Ninth: The Donor further reserves the right to add at any time other policies of insurance to the trust fund created, and without the consent or approval of the Trustees, to add to this trust securities or monies at any time.

“The Donor understands and agrees that the trust shall be operative only with respect to the proceeds of such policies of Insurance as may be due and payable in the event of his death, after the deduction of all charges against said policies by way of advances, loans, or otherwise, either in favor of the Trustees or the insured.

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“Twelfth: The Donor has the right to substitute for Titusville Trust Company and Russell .1. Hopkins, as Trustees, anyone whom he desires, except, however, that such substitution of appointment cannot be made during any time in which he has Indebtedness to the within named Titusville Trust Company.”

2 The origin of section 2036(a) is a provision of the Revenue Act of 1918 including in decedent’s gross estate property of which a decedent made a transfer “intended to take effect in possession or enjoyment at or after his death * * § 402(e), Revenue Act of 1918, 40 Stat. 1097, (1919). The Supreme Court In 1930 held a transfer with a life estate reserved to the donor after the expiration of a life estate to donor’s spouse (remainder to donor’s children) not within the foregoing statute (May v. Heiner, 281 U.S. 238 (1930)), and reaffirmed this decision by announcing per curiam, decisions construing successor statutes, in Burnet v. Northern Trust Co., 283 U.S. 782

(1931) ; Morsman v. Burnet, 283 U.S. 783 (1931) ; and McCormick v. Burnet, 283 U.S. 784 (1931). Congress thereupon promptly enacted a provision reversing the holding (46 Stat. 1516 (1931)), which has since evolved Into § 2036(a) of the 1954 Code.

3 Section 2056(b) (5) reads as follows:

“(5) Life estate with power of appointment in surviving spouse.

“In the case of an interest in property passing from the decedent, if his surviving spouse is entitled for life to all the income from the entire interest, or all the income from a specific portion thereof, payable annually or at more frequent intervals, with power in the surviving spouse to appoint the entire interest, or such specific portion (exercisable in favor of such surviving spouse, or of the estate of such surviving spouse, or in favor of either, whether or not in each case the power is exercisable in favor of others), and with no power in any other person to appoint any part of the interest, or such specific portion, to any person other than the surviving spouse—

(A) the interest or such portion thereof so passing shall, for purposes of subsection (a), be considered as passing to the surviving spouse, and

(B) no part of the interest so passing shall, for purposes of paragraph (1) (A), be considered as passing to any person other than the surviving spouse.

“This paragraph shall apply only if such power in the surviving spouse to appoint the entire interest, or such specific portion thereof, whether exercisable by will or during life, is exercisable by such spouse alone and in all events.”

4 Article Second provides:

“Second: I give, devise and bequeath all of my property, real, personal and mixed, of every description and wherever the same may be situate and of which I may die seised or possessed, to the Titusville Trust Company, of Titusville, Pa., IN TRUST, NEVERTHELESS, for the following purposes :

“My said Trustee shall divide my said estate into two equal portions, designating one portion as ‘Trust Eund A’ and the remaining portion as ‘Trust Fund B\

“From the said ‘Trust Fund A’ my said Trustee shall pay the net income, in at least quarterly installments, to my wife, Dorothy M. McCabe, for and during her natural life, giving and granting, however, to my said wife, the right, in her absolute discretion, to use such amounts out of the principal of said ‘Trust Fund A’ as she may request at any time and from time to time, without restriction. Any balance remaining in the said ‘Trust Fund A’ at the time of her death shall be added to and become a part of ‘Trust Fund B’.

“From ‘Trust Fund B’ my said Trustee shall pay the income from the said Trust Fund, in at least quarterly installments, to my wife, Dorothy M. McCabe, for and during her natural life, and upon her death, or in the event she shall have predeceased me, to my children, In equal parts, share and share alike. Should any child or children of mine predecease me, the Issue of such deceased child or children shall receive the portion of Income and principal Its or their parent would have received If living. Should any child or children of mine leave no Issue then surviving, then In that event, the proportionate share of such child or children shall revert to and become a part of the principal of said ‘Trust Fund B’, to be divided equally among my surviving children and/or the Issue of my deceased child or children, If any.

(Continued)

(Continued)

“As each of my children arrives at the age of twenty-five (25) years, such child shaU receive one-third (%) of Its proportionate share of the said ‘Trust Fund B\

“As each of my children arrives at the age of thirty (30) years, such child shall receive one-third (%) of its proportionate share of the said ‘Trust Fund B’.

“As each child arrives at the age of forty (40) years, such child shall receive his or her remaining proportionate share of the said ‘Trust Fund B’.

“In the event I should die without child or grandchild me surviving, I give, devise and bequeath all of my said ‘Trust Fund B’ to my wife, Dorothy M. McCabe, absolutely, and in the event my said wife should also predecease me, it Is my will that my property go to and be divided In accordance with the Intestate Laws of the State of Connecticut.”

5 Section 20.205S(b)-5 of the Regulations reads in pertinent part as follows:

“(g) Power of appointment in surviving spouse. (1) The conditions set forth in paragraph (a) (3) and (4) of this section, that is, that the surviving spouse must have a power of appointment exercisable in favor of herself or her estate and exercisable alone and in all events, are not met unless the power of the surviving spouse to appoint the entire interest or a specific portion of it falls within one of the following categories:

“(1) A power so to appoint fully exercisable in her own favor at any time following the decedent’s death (as, for example, an unlimited power to invade) ; or

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“(3) * * * Likewise, if there are any restrictions, either by the terms of the instrument or under applicable local law, on the exercise of a power to consume property (whether or not held in trust) for the benefit of the spouse, the power is not exercisable in all events. Thus, if a power of invasion is exercisable only for the spouse’s support, or only for her limited use, the power is not exercisable in all events. In order for a power of invasion to be exercisable in all events, the surviving spouse must have the unrestricted power exercisable at any time during her life to use all or any part of the property subject to the power, and to dispose of it in any manner, including the power to dispose of it by gift (whether or not she has power to dispose of it by will).

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“(j) Existence of a power in another. Paragraph (a) (5) of this section provides that a transfer described in paragraph (a) 1b nondeductible to the extent that the decedent created a power In the trustee or in any other person to appoint a part of the interest to any person other than the surviving spouse. * * • ”

6 Article Fourth provided:

“Fourth: During the continuance of the Trusts hereby created, and at the end thereof, for the purpose of malting final distribution, the Trustee shall have and possess the following powers :

“1. To meet any emergency, accident, sickness, surgical operation, prolonged illness, or any other similar situation which may arise, necessitating any unexpected need of cash for any beneficiary or any respective share herein created, the said Trustee is authorized to use such portions of the principal of these Trust Estates as said Trustee, in its sole discretion, may deem necessary for such purposes, as the particular occasion demands.”