Opinion
Docket No. 52307.
1956-05-11
WILLIAM H. ROBERTSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Frank Chapman, Esq., for the petitioner. Frank V. Moran, Esq., for the respondent.
Frank Chapman, Esq., for the petitioner. Frank V. Moran, Esq., for the respondent.
Petitioner created a trust under which the income was to be paid to his wife during her life with the power in the corporate trustee to pay her so much of the principal as it should deem necessary for her maintenance and support with due regard to her other sources of funds, with remainders to third parties. Petitioner's wife consented to have the remainder gifts considered as having been made one-half by her and one-half by her husband. Petitioner's wife was over 60 years old. She and her husband had been happily married for over 30 years. Petitioner had net assets after the creation of the trust of over $250,000, and an annual income of over $50,000. His wife had other assets. Their standards of living were simple and frugal. In his gift tax return petitioner deducted an exclusion of $3,000 on account of the gift to his wife valued at $22,362, and one-half of the value of the gifts to the remaindermen (such one-half having been reported as a gift by the wife). These deductions were disallowed by respondent on the ground that ‘under the terms of the trust instruments it is impossible to allocate any determinable portion of trust to either the wife or children (the remaindermen) in view of trustees' power to invade corpus.’ Held, wife's interest in trust could be valued and respondent erred in his determination.
Respondent has determined a deficiency of $1,922.28 in petitioner's Federal gift tax for the year 1950. All of this deficiency is here in question. The principle issue is whether the value of an equitable life estate given to petitioner's wife is ascertainable.
FINDINGS OF FACT.
Petitioner lives in New Milford, Connecticut. He and Beatrice Mary Robertson were, at all times material hereto, husband and wife, having been married July, 1919.
On November 17, 1950, petitioner executed a trust agreement with the Hartford-Connecticut Trust Company of Hartford, Connecticut, and Charles N. Robertson, III, of New Milford, Connecticut, as trustees, and on the same date he transferred to the trustees, pursuant to the terms of the trust agreement 200 shares of the common stock of Robertson Bleachery & Dye Works, Inc. (hereinafter sometimes referred to as the Company), having a value on that date of $296.94 per share, or an aggregate value of $59,388.
Article II of the trust agreement provides in part as follows:
The trustees shall pay over the net income, and so much of the principal thereof as the corporate Trustee in its sole discretion but with due regard to her other sources of funds, shall deem necessary for her maintenance and support, at least semiannually to Beatrice Mary Robertson so long as she may live.
The trust agreement thereafter provided that upon the death of petitioner's wife the remainder of the trust estate should be transferred to third parties.
Petitioner filed a Federal gift tax return for the calendar year 1950 reporting such transfer with the collector of internal revenue for the district of Connecticut. On schedule A of the return the petitioner reported the value of the gift to his wife (the life estate) to be $22,362.70, and the value of the gifts to third parties (the remainder gifts) to be $37,025.30.
Petitioner's wife consented to have the remainder gifts made by the trust agreement to third parties during the calendar year 1950 considered as having been made one-half by each of them. She filed a Federal gift tax return for the calendar year 1950 with the collector of internal revenue for the district of Connecticut reporting a gift of $18,512.65.
Petitioner was 61 years and 11 months of age and his wife was 60 years and 4 months of age on November 17, 1950. Her life expectancy, determined in accordance with the respondent's combined standard ordinary table or mortality, on that date was 14 1/2 years. Petitioner's life expectancy was slightly less.
Petitioner is president of Robertson Bleachery & Dye Works, Inc., and has held that position since 1932. His salary as president of the Company for the 5 taxable years preceding 1950 was as follows:
+----------------+ ¦Year ¦Salary ¦ +------+---------¦ ¦1945 ¦$24,000 ¦ +------+---------¦ ¦1946 ¦24,000 ¦ +------+---------¦ ¦1947 ¦30,000 ¦ +------+---------¦ ¦1948 ¦30,000 ¦ +------+---------¦ ¦1949 ¦56,672 ¦ +----------------+ His salary in 1950 and years subsequent thereto has been $50,000 per year.
Petitioner's individual income tax returns for the taxable years 1945 and 1946, and petitioner's and his wife's joint individual income tax returns for the taxable years 1947-1950, inclusive, disclose the following:
+-------------------------------------+ ¦Year ¦Gross income ¦Tax liability ¦ +------+--------------+---------------¦ ¦1945 ¦$26,154.56 ¦$11,004.01 ¦ +------+--------------+---------------¦ ¦1946 ¦26,661.14 ¦10,013,07 ¦ +------+--------------+---------------¦ ¦1947 ¦1 43,810.09 ¦19,341.93 ¦ +------+--------------+---------------¦ ¦1948 ¦1 37,775.73 ¦8,756.54 ¦ +------+--------------+---------------¦ ¦1949 ¦1 70,855.22 ¦22,567.82 ¦ +------+--------------+---------------¦ ¦1950 ¦1 64,991.18 ¦19,450.60 ¦ +------+--------------+---------------¦ ¦ ¦ ¦ ¦ +-------------------------------------+
Petitioner's gross income for the years subsequent to 1950 has been approximately $60,000 per year.
Petitioner's separate assets as of November 1950 consisted of the following: Cash $15,000; 100 shares of Chrysler Corporation; 50 shares of Celanese Corporation; 50 shares of Glenn L. Martin Corporation; 11 shares of Pitney-Bowes Postage Meter Corporation; 820 shares of common (exclusive of the 200 shares transferred on November 17, 1950), and 166 shares of preferred stock of Robertson Bleachery & Dye Works, Inc.; a $25,000 policy of straight life insurance; and a $10,000 policy of group life insurance with Manufacturers Association of Contractors in both of which insurance policies his wife is named as sole beneficiary. The values per share of the preferred and common stock of the Company were $163 and $296, respectively, the aggregate value of petitioner's share in the Company being approximately $286,788. Since 1950 he has acquired 40 additional shares of common and 40 additional shares of preferred stock in the Company. The aggregate value of the non-Company securities owned by the petitioner was $9,430.
Petitioner had an outstanding indebtedness of $69,805 in 1950 in connection with the purchase of certain shares of Robertson Bleachery & Dye Works, Inc., acquired by him from the estate of Philip W. Kopper pursuant to a contract dated December 2, 1948, under the terms of which he is obligated to pay approximately $12,000 per year to and including 1958. The approximate amount of the indebtedness remaining to be paid is $30,000. Petitioner had no other outstanding indebtedness as of November 1950 except then current bills for living expenses, nor does he have any at the present time.
The net profits after income taxes of the Company and dividends paid during the taxable years ended August 31, 1942, to August 31, 1953, inclusive, as disclosed by the books of Robertson Bleachery & Dye Works, Inc., are as follows:
+-------------------------------------------+ ¦ ¦ ¦Dividends ¦ +----+-----------------+--------------------¦ ¦Year¦Net profits after¦ ¦ +----+-----------------+--------------------¦ ¦ ¦income taxes ¦ ¦ ¦ +----+-----------------+----------+---------¦ ¦ ¦ ¦Preferred ¦Common ¦ +----+-----------------+----------+---------¦ ¦ ¦ ¦ ¦ ¦ +----+-----------------+----------+---------¦ ¦1942¦$102,838.05 ¦$36,641.24¦$7,800.00¦ +----+-----------------+----------+---------¦ ¦1943¦117,928.19 ¦34,812.00 ¦7,800.00 ¦ +----+-----------------+----------+---------¦ ¦1944¦88,672.05 ¦35,575.01 ¦10,400.00¦ +----+-----------------+----------+---------¦ ¦1945¦37,799.52 ¦35,288.01 ¦10,400.00¦ +----+-----------------+----------+---------¦ ¦1946¦55,430.60 ¦33,824.00 ¦7,800.00 ¦ +----+-----------------+----------+---------¦ ¦1947¦252,976.47 ¦32,999.75 ¦7,800.00 ¦ +----+-----------------+----------+---------¦ ¦1948¦256,086.16 ¦40,710.00 ¦23,400.00¦ +----+-----------------+----------+---------¦ ¦1949¦235,672.60 ¦39,635.50 ¦23,400.00¦ +----+-----------------+----------+---------¦ ¦1950¦96,327.32 ¦38,019.67 ¦26,000.00¦ +----+-----------------+----------+---------¦ ¦1951¦98,604.50 ¦33,727.99 ¦26,000.00¦ +----+-----------------+----------+---------¦ ¦1952¦62,091.62 ¦33,728.00 ¦26,000.00¦ +----+-----------------+----------+---------¦ ¦1953¦158,530.02 ¦33,728.00 ¦26,000.00¦ +----+-----------------+----------+---------¦ ¦ ¦ ¦ ¦ ¦ +-------------------------------------------+
The separate assets of petitioner's wife as of November 1950 consisted of the following: The family residence, including barn and approximately 17 acres of land, without any mortgage, which had a fair market value of not less than $40,000; $5,000 United States savings bonds; 6 shares of Manufacturers Trust Company of New York; 53 shares of Republic Investors Company; and 57 shares of preferred stock of Robertson Bleachery & Dye Works, Inc. The value of the preferred stock of the Company was $9,291.
The separate income of petitioner's wife, as disclosed on her individual income tax returns for the taxable years 1945 and 1946, and on the petitioner's and her joint individual income tax returns for the taxable years 1947 to 1950, inclusive, was as follows:
+----------------+ ¦Year ¦Income ¦ +------+---------¦ ¦1945 ¦$795.57 ¦ +------+---------¦ ¦1946 ¦792.62 ¦ +------+---------¦ ¦1947 ¦978.66 ¦ +------+---------¦ ¦1948 ¦603.84 ¦ +------+---------¦ ¦1949 ¦620.59 ¦ +------+---------¦ ¦1950 ¦1,218.10 ¦ +----------------+
The dividends per share paid on both Robertson Bleachery & Dye Works, Inc., preferred and common stock during the years 1949 and 1950 was $10. The gross income of the trust from the 200 shares of common stock of the Company is approximately $2,000 per year and the trustees' fees are 5 per cent thereof.
Petitioner and his wife have lived together as husband and wife since their marriage in 1919 and have been and are now happily married. They live on a modest and inexpensive scale. Their aggregate living expenses, including fuel, telephone, electricity, drugs, clothing, food, and taxes, and compensation for a servant, were as follows: 1949 $4,100; 1950 $4,400; 1951 $6,140; and 1952 $6,300. The higher expenses for 1951 and 1952 are the result of the employment of a servant during that period, the increase attributable thereto for such years being $1,680 and $1,820, respectively. The expense of operating their one automobile is $300 a year. Because of the location of their home, the petitioner and his wife do not take vacation trips, their last one being in 1940, and therefore they do not incur any considerable recreational or vacation expenses.
Petitioner's present will, executed November 17, 1950, leaves substantially all of his estate to his wife in the form of two trusts, one a so-called ‘marital deduction trust,‘ the other a residual trust, from which she is entitled to all of the income for life, and, in addition, so much of the principal as the trustees may deem necessary or desirable for her comfortable maintenance, support, benefit, and welfare.
On February 15, 1954, the respondent sent to petitioner a notice of deficiency in the amount of $1,922.28. In his determination of deficiency the respondent disallowed the following items shown on schedule A to the return:
+-----------------------------------------------------------------------+ ¦b. Less portions of items 1 reported by spouse ¦$18,512.65¦ +------------------------------------------------------------+----------¦ ¦f. Less total exclusions not exceeding $3,000 for each donee¦ ¦ +------------------------------------------------------------+----------¦ ¦(except gifts of future interest) ¦3,000.00 ¦ +-----------------------------------------------------------------------+
The disallowance of said items was explained by the respondent in the statement attached to the notice of deficiency as follows:
Under terms of trust instruments it is impossible to allocate any determinable portion of trust to either the wife or children in view of trustees' power to invade principal. Also because of this power the gifts made are of future interests. No exclusions or gift-splitting are allowable under Reg. 108, section 86.10 and 86.3a.
OPINION.
KERN, Judge:
Respondent's argument in justification of the deficiency in gift tax determined in this case may be paraphrased from his brief as follows: That the value of the interest transferred by petitioner to his wife pursuant to the trust agreement of 1950 could not be determined since the trustee could destroy the income interest of the wife by distributing to her the principal of the trust, and therefore no exclusion is allowable with respect to the gift effected by this transfer; and, further, that since the value of the interest transferred to petitioner's wife cannot be determined, it follows that the remainder interests transferred to third parties under the trust agreement were not ‘ascertainable at the time of the gift and hence severable from the interest transferred to his spouse * * * ,‘ pursuant to the requirements of Regulations 108, section 86.3(a)(4), and therefore petitioner is not entitled to the gift splitting provisions of section 1000(f) of the Internal Revenue Code of 1939. It is obvious that the crucial step in respondent's argument is the proposition that it is impossible to value the life interest given the wife under the trust agreement because the corporate trustee is given the power under certain circumstances of making payments to the wife from the trust corpus.
Respondent does not question the valuation of the securities transferred by petitioner in trust nor does he question the methods used or valuations reached in the gift tax return concerning the life interest and remainder interests created by the trust if it should be decided that value of the life interest of petitioner's wife can be ascertained and determined.
Respondent cites and relies on the following cases as supporting the crucial step in his argument: Sylvia H. Evans, 17 T.C. 206, affd. 198 F.2d 435; Jennie Brody, 19 T.C. 126; Merchants Bank v. Commissioner, 320 U.S. 256; Andrew Geller, 9 T.C. 484.
In the latter case we pointed out (p. 495) that there was no logical distinction between cases involving gifts and cases involving deduction of charitable bequests since the question in both is whether values can be ascertained. In Estate of Nathan P. Cutler, 5 T.C. 1304, we considered exhaustively the decisions dealing with the problem of whether a power given trustees to invade the principal of a trust for the benefit of the life tenant made the bequest of the remainder to charity so indefinite as to render it impossible to ascertain the value of such bequest. We concluded on principle and authority that the solution of this problem depended on whether the power to invade principal was absolute or was limited by certain standards by which the possibility of invasion could be gauged, and on whether, if there were standards of limitation, there was a likelihood of the exercise of such power as disclosed by the facts. We approach the solution of the problem of the instant case by considering the same pertinent questions.
In the instant case, unlike the cases cited and relied on by respondent, an invasion of the trust corpus for the benefit of the life beneficiary could be made only if the corporate trustee should deem it ‘necessary for her maintenance and support’ ‘with due regard to her other sources of funds', provisions even more stringent than those in Hartford-Connecticut Trust Co. v. Eaton, 36 F.2d 710, which were deemed to refer to the amount necessary for the wife's support according to her standards of living, and there is also in the record here evidence as to what were the standards of living of petitioner's wife (cf. Andrew Geller, supra, at p. 495). In the instant case we are of the opinion that the power to invade principal is limited by standards by which the possibility of such invasion can be gauged. Cf. Merchants Bank v. Commissioner, supra, where ‘Introducing the element of the widow's happiness and instructing the trustee to exercise its discretion with liberality’ to her and to ‘consider her ‘welfare, comfort and happiness prior to the claims of residuary beneficiaries' * * * ’ ‘brought into the calculation elements of speculation too large to be overcome notwithstanding the widow's previous mode of life was modest and her own resources substantial.’
A more troublesome question is whether there is likelihood, as disclosed by the facts of the instant case, that the power to invade principal, limited by these standards, will be exercised. This is not a theoretical problem of possibility but a practical problem of probability, for the solution of which we may turn to ‘readily ascertainable and reliably predictable facts.’ We think that we may properly consider the following:
Petitioner's wife was over 60 years old in 1950, with a life expectancy of a little over 14 years. Her husband is approximately a year older and they have lived together happily since their marriage in 1919. Her standards of living are frugal and her tastes are modest. They live in a home which she owns. Her husband, whose life expectancy is only a little less than hers, is a successful business man whose annual income since 1949 has been in excess of $50,000. He has always supported his wife as is his duty under Connecticut law. The net value of his assets at the time of the trial herein was approximately $275,000. Among his assets was stock of the prosperous company of which he was president and which paid dividends of over $10,000 a year, a sum considerably in excess of the joint living expenses of petitioner and his wife. His wife owned not only her home worth not less than $40,000, but also securities worth not less than $15,000. She was the beneficiary of her husband's life insurance in the amount of $35,000. Under her husband's will she is entitled to the income of all his estate for life and to so much of the principal as the trustees may deem necessary or desirable for her comfortable maintenance, support, benefit, and welfare.
Includes income of petitioner's wife.
Note the difference between this broad language and the stringent limitations placed upon the power to invade corpus in the Trust agreement of 1950. 2. A New England corporate trustee characterized by the dissenting opinion in Merchants Bank v. Commissioner, supra, as frugal and conservative.
Of course there is a legal possibility, as respondent points out, that petitioner may change the beneficiary named in his life insurance policies and also make a new will disinheriting his wife. However, having heard the petitioner testify, and considering the other facts of record here, we consider such action on his part as theoretically possible but extremely improbable. And even if the extremely improbable occurred, his wife, upon his death, could claim a third of his estate under the law. It is also possible that petitioner's assets will become worthless. By the same token it is possible that the securities which are subject to the gift in trust here will become worthless. However, that possibility has not prevented the valuation of those securities for gift tax purposes at $59,388. It is a truism to say that all future events in human life are subject to uncertainty except death and taxes. However, we must exercise our best judgment as to the likelihood of the occurrence of those events as of certain times, in this case as of the time of the making of the gifts in question.
Bearing in mind all these facts and the provisions of the trust agreement which limit the discretion of the corporate trustee
to invade the trust principal for the wife's maintenance and support ‘with due regard to her other sources of funds,‘ we conclude that there is no likelihood of the exercise of this power as disclosed by the facts of the instant case. See Estate of Edwin E. Jack, 6 T.C. 241; Estate of Anna Finley Kenny, 11 T.C. 857.
We are therefore of the opinion that the life interest given to petitioner's wife under the trust agreement of 1950 can be valued, and that respondent's determination of deficiency, which was based upon the view that this life interest could not be valued, was erroneous.
Decision will be entered for petitioner.