Opinion
Docket No. 4552.
1945-11-23
ELIZABETH S. HETTLER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Francis E. Luthmers, Esq., for the petitioner. Harold H. Hart, Esq., for the respondent.
Gift Tax— Section 501(c), Revenue Act of 1932— Power To Revest in Grantor.—Petitioner transferred property in trust with son as trustee and life beneficiary, but son, as a part of the same transaction, agreed to pay petitioner $25,000, annually, which both knew he could not do, and both trust deed and annuity contract provided that petitioner could reacquire the trust property at any time upon the expected immediate default in the annuity payments. Held, petitioner retained the power to revest title to the trust property in herself and the transfer was not a taxable gift. Sec. 501(c), Revenue Act of 1932. Francis E. Luthmers, Esq., for the petitioner. Harold H. Hart, Esq., for the respondent.
The Commissioner determined a deficiency of $8,827.98 in gift tax for the calendar year 1934 and an addition thereto of 25 percent, or $2,207, under section 519 of the Revenue Act of 1932 and section 406 of the Revenue Act of 1935, for failure to file a timely return. The petitioner contends that she did not make any gift in 1934 which was subject to gift tax. She makes a number of alternative contentions.
FINDINGS OF FACT.
The petitioner is an individual who resides in Chicago, Illinois. She was born December 27, 1870. She had one child, a son, Sangston Hettler, born February 6, 1895. The latter had 2 children in 1934, one aged 9 and the other aged 15. The petitioner was not an active business woman and was not capable of properly managing her property. Her husband had died in 1929. Sangston had managed the petitioner's property for some time prior to January 4, 1934.
The petitioner on January 4, 1934, transferred all of her property in trust. The purpose of this transfer was to enable Sangston to manage the property more easily and to save probate expenses in case of death of the petitioner. The income from the property at that time amounted to about $8,000 a year. The petitioner named Sangston trustee of the trust. The trust deed contained a statement that it was irrevocable. The income of the trust was to be paid to Sangston for life, and upon his death his children were to be beneficiaries. It was a spendthrift trust as to all beneficiaries, except that the trustee could make advances from principal or income for the support, maintenance, comfort, or education of any beneficiary.
The petitioner and Sangston on January 4, 1934, at the time the trust was created and as a part of that same transaction, entered into a contract under which Sangston was to pay his mother $25,000 each year during the term of her life, in equal monthly installments, commencing on the first day of February 1934. The contract also provided that the petitioner, in her discretion, was to have and exercise a first lien on all of the trust property in case of default in any of the payments to be made. The trust instrument also contained provisions recognizing the rights of the petitioner in case of default in the payments due her from Sangston and it provided that upon any request from her, after default, the trustee should reconvey the property comprising the trust or any part thereof which she, in her discretion, might request.
The petitioner and Sangston intended that Sangston should pay the income from the trust property to the petitioner during her life, but should not pay her any amounts from any other source. They knew that the income from the trust property would not be sufficient for the payment of $25,000 each year to the petitioner, and they knew also that the other sources of income which Sangston had would be far from sufficient to enable him to carry out the annuity contract. They estimated that the income from the trust property would be about $8,000 per year. They deliberately fixed $25,000 as the annual amount to be paid by Sangston to the petitioner because it was far in excess of any amount which he would be able to pay. They anticipated and intended that there would be an immediate default under the annuity contract, which would immediately give the petitioner the right to revest title in the trust property in herself. They did not intend that Sangston should withdraw any of the trust corpus in order to make any of the annual payments to the petitioner. The payments due under the annuity contract were in default from the beginning. The income from the trust property and the annuity payments amounted to about $8,000 annually.
The petitioner did not file a gift tax return for 1934 until December 9, 1942, which was after she had been requested to file such a return by the Commissioner of Internal Revenue. She filed that return under protest and claimed therein that she had not made any gift which was subject to gift tax in 1934.
The Commissioner determined that the value of the property which the petitioner transferred in trust in 1934 was $400,500 and the value of an annuity of $25,000 to a person 63 years of age was $215,454.17. He subtracted the latter amount from the former and determined that the difference of $185,045.83 was a gift.
A state court later declared the 1934 trust revocable.
The transfer in trust which the petitioner made in 1934 was not a completed gift in that year.
The facts stipulated are made a part hereof by this reference.
OPINION.
MURDOCK, Judge:
The respondent contends that the transfer in trust which the petitioner made in 1934 was irrevocable and for less than an adequate consideration in money or money's worth. He argues that the petitioner relinquished all control over the economic benefits of the property conveyed in trust. The petitioner contends that she retained in herself the power to revest in herself title to the property and, therefore, the transfer comes within the exclusion provided in section 501(c) of the Revenue Act of 1932 and is not subject to gift tax. She contends that the transfer was never intended to be irrevocable, but, on the contrary, was intended to be revocable, since she and her son both entered into the trust agreement and the annuity agreement with the full understanding and expectation that there would be an immediate default which would give the petitioner power effectively to terminate the trust and revest in herself title to the trust property at any time she might so desire. The evidence fully supports this contention.
The two items having the largest value, according to the Commissioner's determination, were, first, 2,940 shares of the common stock of Herman H. Hettler Lumber Co., valued at $204,330, and, second, several pieces of real estate, valued at $174,654.25. The lumber company had not declared a dividend since 1929 and had sustained losses since that date. The stock was not readily salable. Several of the items of real estate were occupied and used by the lumber company. The petitioner and her son did not intend that he should withdraw any of the corpus of the trust in order to make the annuity payments. The payments could not have been made from this source. The petitioner and her son did not intend that her son should use his own separate income in making payments to her. The son needed that income to support himself and his family, and he could not have used any substantial part thereof for making payments to the petitioner. His separate income amounted to about $8,000 or $10,000 a year. The intention was that the son should pay to his mother during her life the income from the trust property only. That was done. The son had no way of paying his mother $25,000 a year even with the aid of all of the trust property and income. There was an immediate default in the annuity payments, as the parties had intended.
The power to revest in the donor title to the property transferred in trust was vested in the donor immediately after the transfer. Section 501(c) provides that under such circumstances the tax shall not apply, but the relinquishment or termination of such power shall be considered to be a transfer by the donor by gift of the property subject to such power, and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of such income by gift.
We have come to the conclusion, after taking into consideration the evidence in this case, that the transfer was not complete for gift tax purposes in 1934.
The petitioner, after 1934, apparently reacquired full title to the property and then made a more complete gift in 1941, on which she has paid tax and on which the Commissioner has determined a deficiency. Both parties concede that gift tax is due on that later transfer.
Decision will be entered for the petitioner.