Estate of Stettenheim v. Commissioner
This text of 1955 T.C. Memo. 158 (Estate of Stettenheim v. Commissioner) is published on Counsel Stack Legal Research, covering United States Tax Court primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.
Opinion
Memorandum Findings of Fact and Opinion
The Commissioner determined a deficiency of $2,513,219.99 in estate tax. The issues for decision are (1) whether the value of the corpus of each of six trusts is includible in the gross estate under
Findings of Fact
The estate tax return was filed with the collector of internal revenue for the third district of New York.
Isidor M. Stettenheim, the decedent, was born in Germany on June 5, 1855, and he died in New York on June 17, 1946. He came to the United States about 1880 and became a partner in the insurance business in New York City with a man named Hamlin. Isidor and Flora Rich were married on February 4, 1886, when Flora was not quite 21 years of age. They had two children, Ivan born in 1891, and Frederic born on May 3, 1901. Ivan died in 1909. Flora died on June 1, 1931 and Isidor married Daisy Lippmann on February 23, 1935. Daisy survived him.
Frederic was married on May 17, 1927, was divorced in 1940, and died from coronary thrombosis in December 1952. He lived with his parents at 910 Fifth Avenue, New York, until the time*183 of his marriage but not thereafter. Two children were born of that marriage, Frederic R., Jr., in December 1928 and Judith in December 1931. The children and their mother survived Frederic.
Frederic suffered throughout his life from cerebral palsy. He had great difficulty in learning to walk and talk and never could do either well. He was intelligent, had a keen, clear mind, and, except for the cerebral palsy, was healthy. His parents were always very solicitous about his physical condition and his financial condition. They wanted to make their son financially independent during their lifetimes so that he would feel secure enough to marry and have children.
The decedent enjoyed good health throughout his life and never made any transfers of property with any thought of imminent death due to the condition of his health.
The decedent incorporated Hamlin and Company on April 20, 1905, after the death of Hamlin. The corporation, (hereinafter called Hamlin), took over the operation of the insurance business previously conducted by the partnership. The decedent was the sole owner of the business at the time it was incorporated and thereafter he dominated and controlled it. Most of*184 the shares of stock of the corporation were in the names of Flora and Frederic from 1920 until after Flora died.
Hamlin created an Investment Securities Department in 1922 which was operated separately from the Insurance Department. They both had the same address but the office space was physically separate, separate books of account were kept and separate personnel operated each.
The insurance business had dropped off considerably by 1935, and Hamlin had lost several of its best insurance customers. Hamlin & Co. Brokers Inc., (hereafter called Brokers), was incorporated in 1935 to take over and carry on the insurance business. The initial capitalization of Brokers was $10,000 which was supplied by Frederic, and all of the capital stock was issued to him. Frederic was president of Brokers at all times material hereto. Brokers remained in the same office space and made no substantial changes in personnel or in operating methods of the insurance business except that it increased the insurance business which it took over from Hamlin. Isidor was not connected in any way with Brokers. The directors of Brokers met two to three times a year.
Isidor, Flora, Frederic and Daisy were directors*185 and officers of Hamlin, as follows:
| Officer | Director | ||
| Isidor | President | 1905-1917; 1919-1929 | 1905-1946 |
| Treasurer | 1905-1929 | ||
| Chairman of the Board | 1929-1946 |
| Officer | Director | ||
| Isidor | President | 1905-1917; 1919-1929 | 1905-1946 |
| Treasurer | 1905-1929 | ||
| Chairman of the Board | 1929-1946 | ||
| Flora | Vice-President | 1918-1922; 1923-1931 | 1917-1931 |
| Frederic | Vice-President | 1922-1929 | 1922-1951 |
| President | 1929-1946 | ||
| Chairman of the Board | 1946- | ||
| Daisy | Vice-President | 1944-1946 | 1936-1949 |
Frederic came to the Hamlin office occasionally while he was at Columbia University from 1920 to 1923, but he was merely learning the business and did not participate actively until after he left Columbia. He then came to the office regularly although he generally arrived after 10 a.m. and left between 3 and 4 p.m. He devoted himself to the Insurance Department. Frederic never assumed a position of responsibility or authority in Hamlin.
Isidor, Flora and Frederic received salaries from Hamlin during the following years: Isidor, 1917-1930, and 1933-1946; Flora, 1917-1931; *186 and Frederic, 1920-1935 and 1939-1946. Flora attended directors' meetings regularly but did not participate actively in the everyday affairs of Hamlin.
Isidor, Flora and Frederic created the following trusts between 1918 and the date of Isidor's death:
| Name Grantor | Date Created |
| Isidor M. Stettenheim | March 20, 1918 |
| Isidor M. Stettenheim | June 15, 1921 |
| Isidor M. Stettenheim | May 13, 1922 |
| Isidor M. Stettenheim | May 13, 1924 |
| Isidor M. Stettenheim | February 24, 1925 |
| Isidor M. Stettenheim | February 21, 1927 |
| Isidor M. Stettenheim and | |
| Frederic R. Stettenheim | April 1, 1928 |
| Flora R. Stettenheim | May 7, 1928 |
| Frederic R. Stettenheim | May 12, 1928 |
| Frederic R. Stettenheim | May 19, 1930 |
| Frederic R. Stettenheim | October 30, 1931 |
| Frederic R. Stettenheim | December 24, 1935 |
Flora and Frederic, in executing each deed of trust, acted of her or his own free will and not from any undue influence of Isidor. The execution of each trust by either Flora or Frederic followed consultation with and advice of counsel.
The Commissioner, in determining the*187 deficiency, made the following additions to the gross estate on account of transfers in trust:
| Transfers | Returned | Determined |
| Item 1 - 4/1/28 Trust | $65,599.34 | $1,234,875.63 |
| Item 2 - 2/21/27 Trust | 0.00 | 1,888,399.64 |
| Item 3 - 15,000 shares Hamlin & Company placed in | ||
| trust of 5/7/28 in which Flora R. Stetten- | ||
| heim is named as creator | 0.00 | 1,616,122.76 |
| Item 4 - Hamlin & Co. Brokers, Inc., placed in trust of | ||
| 12/24/35 created by Frederic R. Stetten- | ||
| heim | 0.00 | 25,234.90 |
The items above listed are determined to be includible as part of the gross estate within the provisions of
Frederic, Isidor and Daisy entered into an agreement on February 26, 1935, whereby Frederic agreed that if Isidor died leaving Frederic and Daisy surviving him then Frederic would pay the rental on the apartment at 910 Fifth Avenue, New York, or rent on a similar apartment and $1,000 per month to Daisy for her support and maintenance for her life, and would permit her to use during her life the furnishings and art objects in the apartment at the time of Isidor's death. The payments*188 were to be made from the income received by Frederic under the trust agreements of April 1, 1928, and October 30, 1931, and the supplemental agreement of January 28, 1932. Hamlin and Isidor entered into a contract on June 19, 1935, whereby Hamlin agreed that upon the death of the survivor of Isidor and Frederic, it would pay $2,000 per month to Daisy during her lifetime in consideration for Isidor's agreement to continue as chairman of the Hamlin Board of Directors at an annual salary of not in excess of $50,000 so long as his health permitted.
Frederic, Isidor and Daisy entered into another agreement on June 25, 1937, whereby the earlier agreement of February 26, 1935, was cancelled, and Frederic promised that if Isidor died survived by Daisy, he, Frederic, would pay her $3,000 per month for her life out of the income received by him from the trust of May 7, 1928, as amended, or if such income was insufficient, from any other income or assets at his command. Frederic's obligation was to terminate upon his death but Daisy was to have the lifetime use of the furnishings and art objects in the apartment at 910 Fifth Avenue. Frederic's promise was expressly conditioned upon the non-exercise*189 or the ineffectual exercise by Isidor of his power of appointment under the May 7, 1928 trust, as amended. Hamlin and Isidor on the same date, June 25, 1937, entered into a new agreement which cancelled their contract of June 19, 1935. Isidor agreed to continue to act as chairman of the Board at an annual salary of not in excess of $50,000 per year in exchange for Hamlin's promise to pay Daisy $3,000 per month for her life following the death of both Frederic and Isidor.
Both of the June 25, 1937 contracts were modified by agreements dated December 17, 1942, one entered into by Frederic, Isidor and Daisy, and the other by Hamlin, Isidor and Daisy. The first provided that on the death of Isidor, Frederic would pay Daisy $1,500 per month for her life out of the income of the trusts of February 21, 1927, May 7, 1928 and October 30, 1931, or from such other income or assets at his command, if the income of the trusts was insufficient. Frederic's obligation was to terminate upon his death. The agreement with Hamlin provided that Isidor would continue to serve as Chairman of the Board at an annual salary of not in excess of $36,000 and after his death leaving both Daisy and Frederic surviving*190 him, Hamlin would pay Daisy $1,500 a month for her life or $2,000 per month for her life if Frederic was then dead. The monthly payments to Daisy were to be increased to $2,000 for her life in the event that Frederic died after Isidor.
The Commissioner included the amount of $80,528.36 in Isidor's gross estate in determining the deficiency herein. The explanation furnished in the notice of deficiency was as follows:
"The value of the annuity of $18,000. payable to Daisy Stettenheim for life, is determined to be $80,528.36 and it is further determined that said total is includible as part of the gross estate within the provisions of the Internal Revenue Code and the regulations relating thereto."
The Commissioner, in his notice of deficiency, included in Isidor's gross estate under
| Value | |||
| Value | at which | ||
| Policy | at which | Included by | |
| No. | Returned | Commissioner | |
| Mutual Life Insurance Company of New York | 1308248 | $3,523.76 | $ 7,384.24 |
| Mutual Life Insurance Company of New York | 1308250 | 3,523.76 | 7,384.24 |
| Equitable Life Assurance Society of the United States | 625429 | 0 | 8,000.00 |
| Equitable Life Assurance Society of the United States | 1559795 | 0 | 8,357.00 |
| Mutual Life Insurance Company of New York | 281717 | 0 | 16,575.00 |
| Mutual Life Insurance Company of New York | 304798 | 0 | 14,246.27 |
| Security Mutual Life Insurance Company | 1957 | 0 | 548.15 |
| Manhattan Life Insurance Company of New York | 43810 | 0 | 2,000.00 |
| Manhattan Life Insurance Company of New York | 50025 | 0 | 11,050.00 |
| Manhattan Life Insurance Company of New York | 65502 | 0 | 7,000.00 |
| Washington Life Insurance Company | 153690 | 0 | 16,575.00 |
| National Life Insurance Company | 156137 | 0 | 12,675.00 |
| National Life Insurance Company | 151538 | 0 | 4,285.00 |
| National Life Insurance Company | 151539 | 0 | 4,285.00 |
| Mutual Benefit Life Insurance Company | 807262 | 0 | 10,945.41 |
| Union Central Life Insurance Company of Cincinnati, Ohio | 560648 | 0 | 17,925.00 |
| New York Life Insurance Company | 901241 | 0 | 50,000.00 |
*191 The terms of, endorsements on and assignments of all of these policies as stipulated are incorporated herein by this reference. Isidor did not pay the premiums on any of these policies after 1924. He possessed at the time of his death incidents of ownership exercisable either alone or in conjunction with another person in only 5 of the policies as follows:
| Policy | ||
| Company | No. | Incidents of Ownership |
| Equitable | 625429 | Change beneficiaries |
| Equitable | 1559795 | Change beneficiaries; cash surrender and loan privileges |
| Security Mutual | 1957 | Change beneficiaries |
| Mutual Benefit | 807262 | Change beneficiaries |
| Union Central | 560648 | Change beneficiaries; cash surrender and loan privileges |
Isidor possessed all of the incidents of ownership in Mutual Life policies Nos. 1308248 and 1308250 after January 10, 1941, but did not possess any of such incidents at the time of his death. He paid 47.72 per cent of the total premiums on each of these two policies, and 47.72 per cent of the value of each of these policies on the date of his death was reported in the estate tax return filed by the executors of his estate. He possessed no incidents of ownership in any of the*192 other policies in question after January 10, 1941.
Mutual Life policies No. 281717 and No. 304798 were assigned on June 7, 1937, by the joint action of Isidor and Frederic, then the beneficiary, to Elinor J. Stettenheim, Frederic's wife. She assigned both policies, on October 26, 1944, to Hamlin. Mutual Life policies No. 1308248 and No. 1308250 were assigned on November 5, 1945, by the joint action of Isidor and Frederic, then the beneficiary, to the Flora R. and Isidor M. Stettenheim Foundation, Inc., a charitable foundation incorporated under the laws of the State of New York on June 21, 1930. Frederic, on January 28, 1932 assigned to the trust created by him on October 30, 1931, all of his right, title and interest as the beneficiary of certain policies of insurance on the life of Isidor, including the remaining 13 policies in issue herein. Only 3 of these policies, Manhattan No. 43810 and No. 50025 and New York No. 901241, were actually assigned to the trustees. The proceeds of the other 10 policies were made payable to the trustee but the policies themselves were not assigned.
The stipulation of facts including the exhibits annexed thereto are incorporated herein by this reference.
*193 Opinion
MURDOCK, Judge: The Commissioner says that the decedent amassed a fortune of approximately $5,000,000 and yet only a small estate was reported to be subject to estate tax, and he concludes that Flora and Frederic, in the holding of stock of Hamlin and in the creation of several trusts, were mere puppets of and were dominated and controlled by Isidor so that the corpus of the trusts of which Flora and Frederic were the nominal creators should be included in the gross estate of Isidor, the real grantor of those trusts. Isidor, Flora and Frederic were a closely knit family with much in common. However, Flora and Frederic were intelligent persons who were adequately informed and aware at all times of what they were doing, and there can be no general sweeping aside of their separate actions upon the theory that they did not do their own will but were mere puppets of Isidor. Indeed there is testimony that Flora probably influenced Isidor to a greater extent than he influenced her. Isidor frequently made the first contact with the attorney when the creation of a trust was under consideration, but thereafter the creator of the trust always consulted with and was fully advised by*194 the reputable attorney. The evidence refutes any inference that Flora or Frederic ever failed to exercise her or his own free will in the creation of any trust. The various trusts can not be considered on a wholesale basis but must be examined separately. It then appears that the trusts escape estate tax principally because they were created many years ago, before the tightening of the estate tax laws.
Isidor created a series of trusts, beginning in 1918, which finally resulted in a superseding trust which he created on February 21, 1927. The Commissioner, in determining the deficiency, added to the reported gross estate $1,888,399.64, representing the value of the corpus of that trust. He argues in a general way in his brief that the trust was revocable and therefore within the provisions of
Isidor and Frederic executed a trust instrument dated April 1, 1928, and transferred securities to that trust. The income of the trust was to go to Flora during her life. The only extent to which Isidor was a beneficiary of the trust was that if both he and Frederic survived Flora, then the income after Flora's death was to go to Isidor during the remainder of his life. The other possible beneficiaries of the trust were Frederic, his children and the residuary legatees under the will of Flora. The grantors reserved no power to alter, amend or revoke the trust. The Commissioner, in determining the deficiency, increased the value of the corpus of this trust to be included in the gross estate from $65,599.34, as reported in the estate tax return, *196 to $1,234,875.63. He states in his brief that "both
The Commissioner argues further, however, that the instruments of April 1, 1928, October 30, 1931 and January 28, 1932 are interwoven inasmuch as each of them was the handiwork of Isidor. He regards the October 30, 1931 trust as an amendment to the April 1, 1928 trust "which is tantamount to a retention of income for life, and a reservation created after March 3, 1931." Frederic created the October 30, 1931 trust and contributed to it his remainder interest in the April 1, 1928 trust. The Commissioner says that the amendment "changed the devolution to take effect after Isidor's death where formerly it would have terminated at his death, and this brings it within
The Commissioner, in determining the deficiency, added to the reported gross estate $1,616,122.76, representing the value of 15,000 shares of Hamlin stock "placed in trust of 5-7-28 in which Flora R. Stettenheim is named as creator." The Commissioner alleged in an amended answer that only 13,500 instead of 15,000 shares of Hamlin stock were placed in the trust of May 7, 1928. Flora executed a deed of trust dated May 7, 1928, and transferred to herself, Isidor and Frederic, as trustee, 9,000 shares of the stock of Hamlin and her rights thereunder. The trust was irrevocable and no power to alter or amend was retained. Isidor was to receive the income of the trust during his life and thereafter Frederic was to receive it for his life. The principal of the trust, together with any accumulated income, was to go upon the death of the survivor of Isidor and Frederic to the persons designated in Isidor's will as his residuary*198 legatees. Frederic, Isidor and Daisy had entered into a written agreement dated June 25, 1937, in order to provide for the support of Daisy by Frederic after the death of Isidor. The payments which Frederic agreed therein to make to Daisy were "expressly conditioned upon the non-exercise or the ineffectual exercise by the party of the second part [Isidor] of the power of appointment provided for in paragraph 'THIRD' of said trust dated May 7, 1928, as amended." Isidor executed an instrument dated October 20, 1942 whereby he released and renounced his power of appointment under the trust created by Flora on May 7, 1928.
The Commissioner argues in his brief that actually Isidor was the transferor to the trust of the 9,000 shares since they were under his dominion and control and in his possession. The Commissioner then states that the transfer was a testamentary disposition by Isidor within
The finding has been made from the evidence that the decedent enjoyed good health throughout his life and never made any transfer of property with any thought of imminent death due to the condition of his health. The transfer under consideration was made approximately 18 years before the death of the decedent. The nonexercise of his power of appointment was the consideration for a contract which he entered into in 1937 and he formally released and renounced that power in 1942. The evidence as a whole justifies the conclusion that the corpus of this trust can not be included in the gross estate of Isidor under
"An interest in property of which the decedent made a transfer, on or before October 7, 1949, intended to take effect in possession or enjoyment at or after his death shall not be included in his gross estate under paragraph (1)(C) of this subsection*200 unless the decedent has retained a reversionary interest in the property, arising by the express terms of the instrument of transfer and not by operation of law, and the value of such reversionary interest immediately before the death of the decedent exceeds 5 per centum of the value of such property."
Isidor had a life estate in the property but he retained no reversionary interest and
Frederic executed a deed of trust dated May 12, 1928. The corpus of that trust was supposed to be 1,000 shares of Hamlin stock. The Commissioner in his brief argues that the corpus of that trust should be included in the gross estate, but he made no reference to that trust in the notice of deficiency, and, although he amended his answer three times, he has not raised as an issue for decision in this case the question of whether the value of the corpus of that trust should be included in the gross estate of Isidor. That question not being before the Court is not discussed.
The Commissioner, in determining the deficiency, added to the value of the gross estate as reported $25,234.90, representing the value of stock of Brokers which was the corpus of a trust created by Frederic on December 24, 1935. The evidence shows that Frederic incorporated that company, paid $10,000 for its stock, and was its sole stockholder. The corporation carried on the insurance business formerly carried on by Hamlin, and Isidor had nothing*202 to do with the conduct of that business by Hamlin and Co. Brokers Inc. The Commissioner makes no argument in his brief with respect to that trust. The Court assumes that the Commissioner has conceded that he erred by including the value of the corpus of that trust in Isidor's gross estate.
The Commissioner by an amended answer also seeks to have included in the gross estate under
The transfer was made approximately 16 years prior to Isidor's*204 death and at a time when he was enjoying good health. The evidence fails to show that this transfer was made in contemplation of death within the meaning of
The Commissioner, in determining the deficiency, included the amount of $80,528.36*205 in the decedent's gross estate as the value of an annuity payable by Hamlin to Daisy for life following Isidor's death. He mentioned no section of the Internal Revenue Code either in the notice of deficiency or in his main brief under which the amount was included. He contends in his reply brief that the value of the annuity is includible on the ground that it was a transfer of property "procured through the performance of services by Isidor alone, with the intent of having it pass at the time of his death. His demise was the operative fact which motivated the promisor's duty to pay and completed the shifting of the economic benefit of the property."
It is clear from the terms of the contract of December 17, 1942, that Isidor did not retain either an interest for his life in this annuity or a reversionary interest therein and that, therefore, the value of the annuity at the time of his death is not includible in his estate under either
The Commissioner, in determining the deficiency, included in the gross estate the values of 17 policies of insurance taken out on the life of the decedent and gave as one of his explanations that the amounts were includible under
The Commissioner did not err in including the proceeds of the following policies in the gross estate under
| Company | Numbers |
| Equitable | 625429 |
| Equitable | 1559795 |
| Security Mutual | 1957 |
| Mutual Benefit | 807262 |
| Union Central | 560648 |
The stipulated facts further show that the decedent did not retain any of the incidents of ownership or pay any of the premiums with respect to the other 10 policies after January 10, 1941. Section 404(c) of the Revenue Act of 1942, as amended by section 503(a) of the Revenue*208 Act of 1950, applicable to the estate of this decedent, provides with respect to
The Commissioner also held that the values of the 17 policies were includible in the gross estate of the decedent under
The petitioner raised issues with respect to a $10,000 item and a $300 item, but no evidence was introduced with respect to them. The Court assumes that they have been waived, but in any event, is not in a position to make any decision favorable to the petitioner with respect to either of them.
Decision will be entered under Rule 50.
Related
Cite This Page — Counsel Stack
1955 T.C. Memo. 158, 14 T.C.M. 592, 1955 Tax Ct. Memo LEXIS 180, Counsel Stack Legal Research, https://law.counselstack.com/opinion/estate-of-stettenheim-v-commissioner-tax-1955.