Opinion
Docket No. 7921.
1946-11-14
BARBARA M. LOCKARD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
James D. Dow. Esq., for the petitioner. J. T. Haslam, Esq., for the respondent.
In 1938 the petitioner created a trust under the terms of which the net income was payable to her husband for a period of six years. At the expiration of that time, or in the event of the husband's earlier death, the property was to be returned to the petitioner. On December 31, 1941, the petitioner executed a new agreement by which she gave the income from the trust to her husband for his life and gave the trustee power to pay over to her husband up to $3,000 per year from principal if it became, in the trustee's discretion, necessary for his comfort and support. Upon termination of the trust the property was to be returned to petitioner or her designee. During the years 1938 to 1941, inclusive, the respondent taxes the trust income to petitioner under section 22(a), and the principles of Helvering v. Clifford. Held, (1) following James A. Hogle, 7 T.C. 986, that the transfers in 1938 and 1939 were completed taxable gifts when made, notwithstanding the trust income was taxed to the settlor from 1938 to 1941 under the Clifford rule; (2) that the value of the 1941 gift is the value of the right to receive, during the donee's life, $3,000 per year from principal, plus interest on the diminishing fund. James D. Dow. Esq., for the petitioner. J. T. Haslam, Esq., for the respondent.
This proceeding involves a proposed deficiency of $5,517.39 in gift tax liability for 1941.
The main issue raises the question as to whether a beneficiary's right to receive the income under a short term trust, the income of which is taxed to the donor under the Clifford case, constitutes a completed gift, or whether the amounts actually distributed to the beneficiary constituted gifts in the year and in the amount received by him. The second question relates to the valuation for gift tax purposes of the right to income for life and a power in the trustee to distribute corpus up to a certain amount in each year if necessary for the life tenant's comfortable maintenance and support.
The facts have been stipulated by the parties and are hereby adopted as our findings. In so far as necessary they are set forth below.
FINDINGS OF FACT.
The petitioner is an individual, residing in Cambridge, Massachusetts. The gift tax return here in question was filed with the collector of internal revenue for the district of Massachusetts.
On March 30, 1938, the petitioner transferred certain property to herself and James D. Dow, Jr., in trust for the benefit of her husband, Derwood W. Lockard. Under the terms of the trust her husband was to receive the net income until March 31, 1944, or until his death prior to that date. On April 1, 1944, or at the earlier demise of the husband, the principal of the fund was to revert to the petitioner free of trust. The value of her husband's right to receive the income from March 30, 1938, to March 31, 1944, was $24,363.93. On March 30, 1939, the petitioner transferred additional property to the trust. The value of her husband's right to the income from the additional property over the period March 30, 1939, to March 31, 1944, was $3,232.02.
The beneficiary of the trust, Derwood W. Lockard, was born in September 1907, and was 34 years of age in 1941.
The petitioner filed gift tax returns for the years 1938 and 1939, reporting the above transfers. In the 1938 return she deducted an exclusion of $5,000 from the reported value of $24,363.93 and claimed the remainder of $19,363.93 as a specific exemption. In her 1939 return she claimed a specific exemption of $3,232.02.
The petitioner resigned as one of the trustees on December 26, 1940.
Under date of December 31, 1941, the petitioner relinquished her right to receive the corpus of the trust on April 1, 1944, by amending the trust instrument in part to read as follows:
2. Until the death of my said husband, Derwood W. Lockard, to pay the entire net income thereof to him, and to pay to him such amounts from principal, not in excess of $3,000 in any calendar year, as the trustee in his uncontrolled discretion shall think necessary for the comfortable maintenance and support of the said Derwood W. Lockard.
3. Upon the death of said Derwood W. Lockard to transfer the principal then held to me if I shall then be living, and if I shall not then be living, to my executors, administrators or assigns free of trust;
The petitioner filed a gift tax return for the year 1941 in which she reported the transfer as a gift of $55,000. From that value she deducted a specific exemption of $40,000, showing a gift of $15,000 and a tax liability of $330.
The value of the husband's right to receive the trust income after December 31, 1941, for the remainder of his life was $91,434.02. The value of his right to receive the trust income after March 30, 1944, for the remainder of his life was $84,535.90. The value of the husband's right to receive each year after March 30, 1944, the amount of $3,000 from the principal of the trust, together with the income from the diminishing fund, for the remainder of his life, was $99,459.37.
The income from the trust available for distribution and the amount of income distributed to the beneficiary for the years 1938 to 1941, inclusive, were as follows:
+------------------------------------------------------------------------+ ¦Year¦Income available for distribution¦Amount distributed to beneficiary¦ +----+---------------------------------+---------------------------------¦ ¦1938¦$6,443.70 ¦$5,150.00 ¦ +----+---------------------------------+---------------------------------¦ ¦1939¦8,526.89 ¦9,820.59 ¦ +----+---------------------------------+---------------------------------¦ ¦1940¦8,892.81 ¦8,750.00 ¦ +----+---------------------------------+---------------------------------¦ ¦1941¦8,300.01 ¦4,175.00 ¦ +------------------------------------------------------------------------+
Up to October 1945 the p to October 1945 the trustee had not made any payments to the beneficiary from the principal of the fund, nor had the beneficiary requested any such payment from him.
For the years 1938 to 1941, inclusive, the distributable trust income in the amounts above shown was included in the income of the petitioner by the respondent under the rule of Helvering v. Clifford.
The respondent computed the petitioner's gift tax liability for 1941 in the following manner:
+-----------------------------------------------------------------------------+ ¦Value of trust corpus at December 31, 1941 ¦ ¦ ¦$139,935.38¦ +-------------------------------------------+----------+----------+-----------¦ ¦Present worth of the right of beneficiary ¦ ¦ ¦ ¦ ¦to receive $3,000 a year from ¦ ¦ ¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦principal plus 4% on the diminishing trust ¦ ¦ ¦99,459.37 ¦ ¦corpus ¦ ¦ ¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Specific exemption ¦ ¦$40,000.00¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Less: ¦ ¦ ¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Claimed in 1938 ¦$19,363.93¦ ¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Claimed in 1939 ¦3,232.02 ¦ ¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦22,595.95 ¦ ¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦ ¦17,404.05 ¦ ¦ ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Net gift 1941 ¦ ¦ ¦82,055.32 ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Tax liability ¦ ¦ ¦5,847.39 ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Tax paid ¦ ¦ ¦330.00 ¦ +-------------------------------------------+----------+----------+-----------¦ ¦Tax deficiency ¦ ¦ ¦5,517.39 ¦ +-----------------------------------------------------------------------------+
OPINION.
ARUNDELL, Judge:
Initially, the controversy here is whether for gift tax purposes the transfers in trust in 1938 and 1939 were completed gifts, in view of the fact that the income of the trust for the years 1938 to 1941, inclusive, has been taxed to the petitioner as grantor under section 22(a) of the Internal Revenue Code and the rule of Helvering v. Clifford, 309 U.S. 331. Petitioner contends that they were not. However, since the instant case was submitted and the briefs were filed, this Court has passed upon an almost identical question in James A. Hogle, 7 T.C. 986. We there said:
* * * It does not follow as a matter of course that, because income of a trust is taxable to the grantor, the transfer in trust is incomplete as to that income for gift tax purposes and that a gift tax liability arises when, as the income is earned, it is allowed to remain in the trust. The two taxes are not that closely integrated. * * *
And we there held that transfers in trust in 1922 and 1932 were completed gifts, notwithstanding that some of the trust income had subsequently been taxed to the grantor under the Clifford rationale. On the authority of the Hogle case, we must sustain the respondent as to the first issue, and we accordingly approve his determination that the 1938 and 1939 transfers had absorbed $22,595.95 of petitioner's $40,000 specific exemption, leaving $17,404.05 available for use in the taxable year.
The final question concerns the valuation to be placed upon petitioner's gift of December 31, 1941, that is the gift, from and after March 31, 1944, of the trust income to her husband for his lifetime, coupled with the power given the trustee to pay to her husband from the corpus not in excess of $3,000 in any calendar year, as the trustee in his discretion might think necessary for the husband's comfortable support and maintenance. Respondent has valued the gift at $99,459.37, representing the value of the right to receive $3,000 a year after March 30, 1944, from principal, plus interest on the diminishing fund.
Petitioner contends that only the value of the life income should be subjected to the tax; that the Commissioner's method of valuation is unrealistic because it treats as an absolute certainty the invasion of corpus to the extent of $3,000 a year, whereas the corpus may never be invaded; that if and when invasion becomes necessary, gifts will then be complete and subject to the tax in the years distributed.
Petitioner's argument, without doubt, is an impressive one and has a strong practical appeal. Nevertheless, we think that decision of the instant issue is controlled by the principles enunciated by the Supreme Court in Robinette v. Helvering, 318 U.S. 184, and Smith v. Shaughnessy, 318 U.S. 176, which require us to sustain the respondent.
In the Smith case the Court said that the ‘essence of a gift by trust is the abandonment of control over the property put in trust.‘ Here the petitioner, by her transfer in trust, abandoned all control over and irrevocably committed the corpus, to the extent of $3,000 a year, to invasion for the benefit of her husband, if the need therefor should arise. Whether or not the corpus to that extent would be so used and, consequently, whether or not any of the portion so committed would ever be returned to her, were dependent entirely upon ‘contingencies beyond (her) control.‘ Robinette v. Helvering, supra; cf. Commissioner v. Marshall, 125 Fed.(2d) 943. If in each year after the transfer became effective the circumstances of the husband should be such as to require the distribution to him of $3,000 of the principal and the trustee should determine to make such distributions, petitioner would be powerless to prevent it.
A problem in many respects similar to that under consideration here was present and decided in John A. Griswold, Jr., 3 T.C. 909. There the donor had established a trust, the income of which was payable to his mother for life. The trustees, however, were authorized in their discretion to pay the life beneficiary from time to time out of the principal ‘such sum or sums as they may deem appropriate.‘ There the taxpayer, as does the petitioner here, contended that the gift was on its face only of the life estate and that, as to corpus, gift tax would arise only when the trustees should exercise their discretion to make distributions therefrom to the life tenant. This Court there said:
* * * The contention, in our opinion, may not be sustained. The transfer is one in trust, irrevocable, for certain purposes named. One of these is the discretionary distribution of any or all of the corpus to the person receiving the income for her lifetime. Under such facts, we think the settlor, under the principles laid down in the Robinette, Smith v. Shaughnessy, and Marshall cases, supra, lost all ‘economic control‘ and economic benefits, rendering the entire value of the corpus subject to gift tax. The settlor retained only a mere possibility that, if the trustees did not dispose of the corpus to the mother, he might to that extent again have an interest by way of reversion. * * *
It is true that there are some differences between that case and this, but they are of degree only. What was said in the Griswold case with respect to the whole corpus is equally applicable here with respect to so much of the corpus as is irrevocably committed to and subject to invasion for the husband's benefit, i.e., to the extent of $3,000 a year.
It is also true that here a standard, not present in the Griswold case, was provided to govern the trustee in the exercise of the power to invade principal. Whether or not under the particular circumstances of this case, considering the donee's comparative youth, the petitioner could have established with any reasonable degree of exactness what the donee's needs might be for the remainder of his life expectancy, and to what approximate extent the corpus might have to be invaded, we do not know. It may be that if that could be done and in fact had been done here, some reduction in the value determined by respondent for the whole gift could be allowed. Under the Robinette case, supra, the burden is upon one claiming a deduction from full value of the gift by virtue of what he retains to ‘establish the possibility of approximating what value he holds.‘ The record before us, however, affords no basis upon which we could determine with any reasonable accuracy what amounts of corpus may actually have to be invaded for the husband's benefit in years to come.
It follows that the value determined by respondent, $99,459.37, should be included in determining petitioner's gift tax liability for 1941.
Reviewed by the Court.
Decision will be entered for the respondent.