Opinion
Docket No. 10877.
1947-11-28
G. C. HERRMANN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Dorothy Ann Kinney, Esq., for the petitioner. D. Louis Bergeron, Esq., for the respondent.
Petitioner and his wife decided to execute gifts in trust of an undivided community interest in an oil and gas lease for the benefit of their children. In the fall of 1942 they discussed the terms of the trusts with their eldest daughter, who orally accepted the trusteeship just before leaving the state. In December 1942 petitioner and his wife executed the trust instruments and assignments of interest and delivered them to their attorney, who mailed the assignments for recordation. The trustee returned in August 1943 and signed the trust instruments. Held, petitioner's gifts in trust were completed in 1942 rather than 1943. Dorothy Ann Kinney, Esq., for the petitioner. D. Louis Bergeron, Esq., for the respondent.
The Commissioner determined a deficiency of $1,200 in gift tax for the calendar year 1943. The single question presented is whether gifts in trust by G. C. Herrmann, hereinafter referred to as petitioner, of an undivided community interest in an oil and gas lease were completed in 1942 or 1943.
FINDINGS OF FACT.
Petitioner is an individual residing at Amarillo, Texas. His gift tax return for the year here involved was filed with the collector of internal revenue for the second district of Texas.
On September 3, 1941, petitioner entered into a partnership agreement with three other parties for the operation of an oil and gas lease, hereinafter referred to as the lease, covering the following described property: ‘All of the West one-half (W/2) of Tract No. Four (4), of the Owners Subdivision of Section No. Four (4) Block M-21, TC Ry. Co. Survey, Hutchinson County, Texas. ‘ The operation was to be conducted under the name of ‘Harvester Oil Company.‘ Dunigan Brothers, a partnership composed of James B. Dunigan and E. J. Dunigan, Jr., owned a one-half interest and petitioner and his brother, A. E. Herrmann, each owned a one-fourth community interest in the aforesaid lease.
Petitioner and his brother desired to secure their children financially against possible business reverses. In the spring of 1942 they consulted Walter G. Russell, hereinafter referred to as the attorney, with respect to the creation of trusts to which their respective interests in the oil and gas leases could be assigned for the benefit of the children. The trust agreements and conveyances pertaining to the trusts created by A. E. Herrmann and his wife were executed on or about October 1, 1942, and the grantors' oldest daughter was appointed trustee. Final drafts of these instruments were shown to petitioner in the summer or fall of 1942, as it was his intention to create trusts for the benefit of his four children which would be substantially like the trusts created by his brother, except that petitioner intended also to embody a provision which would care for his grandchildren.
Petitioner desired that his married daughter, Regina Theresa Baird, eldest of the children and of age in 1942, act as trustee. He was concerned, however, about her ability to serve properly in that capacity. By agreement with the petitioner, the attorney conferred with Mrs. Baird in the late summer or early fall of 1942 and explained the nature of the trust instruments and the duties and responsibilities of a trustee under such terms. Petitioner's daughter agreed to serve ‘to the best of her ability and fairly to the other beneficiaries.‘ Mrs. Baird thereafter advised petitioner and his wife of her willingness to act as trustee.
Mrs. Baird and her husband, I. R. Baird, departed for California in October or November 1942, where the latter became employed as a defense worker in San Diego. They remained in California until their return to Texas in the summer of 1943.
Upon instruction from petitioner, the attorney prepared the trust instruments and assignments of interest in the lease, which were in all essential respects similar to the A. E. Herrmann trust documents. This work was completed on or about December 1, 1942, whereupon, on December 1, 1942, petitioner and his wife executed (1) an assignment of an undivided one-eighth interest (one-half of their community interest) in the lease to Regina Herrmann Baird, trustee, and (2) in connection with such conveyance, an instrument creating a trust known as the ‘G. C. Herrmann Trust Estate.‘ On December 4, 1942, petitioner and his wife disposed of their remaining right, title, and interest in the lease by executing (1) an assignment of such interest to Regina Herrmann Baird, trustee, and (2) a trust instrument which created the ‘Regina L. Herrmann Trust Estate.‘
Both assignments were acknowledged by petitioner and his wife on December 19, 1942, before a notary public. The trust instruments were executed by the grantors on December 1 and December 4, 1942, respectively, and were acknowledged by them on August 27, 1943.
In establishing the two trusts, which named Regina Theresa Baird, Rose Mary Herrmann, Josephine Anna Herrmann, and Kathleen Agnes Herrmann as beneficiaries, irrevocable gifts of the grantors' complete right, title, and interest in the lease were made ‘to the Trustee for the sole use and benefit of said children.‘ The usual powers of management were accorded to the trustee, or substitute trustees, as specified in the instruments. The trustee was entitled to reasonable compensation for services rendered, not to exceed $75 annually. Trust income was to be accumulated for the named beneficiaries, or their surviving issue, per stirpes, to be distributable when the respective beneficiaries reached the age of 25 years. The trusts were to terminate on the date the youngest named beneficiary became 30 years of age, to be followed by distribution of the trust estate to the named beneficiaries or the surviving issue of deceased beneficiaries, per stirpes.
After the trust instruments and assignments were executed the petitioner deposited them with the attorney ‘to be recorded or to be taken care of.‘ On December 31, 1942, the attorney mailed the assignments, together with petitioner's check to cover the cost of recording, to the county clerk of Hutchinson County, Texas, in whose office the conveyances were filed for record January 2, 1943, and recorded January 4, 1943.
The attorney advised petitioner that the execution of the assignments and trust instruments and oral acceptance by Mrs. Baird had completed the gifts in 1942. Petitioner decided that in view of his daughter's unsettled status in California it would be wise to delay her signature until her return to Texas. The trust instruments and recorded assignments were held by the attorney until Mrs. Baird, trustee, and her husband signed and acknowledged the trust agreements in August 1943.
The petitioner notified E. J.Dunigan, Jr., by letter of January 9, 1943, and affidavit enclosed therein, that he and his wife had assigned in trust an undivided one-fourth interest in the oil and gas lease as of December 1 and December 4, 1942. He stated further:
* * * This letter, therefore, will authorize you to make any remittances that would ordinarily be paid to me for oil and gas sales to the account of the two named trust estates, said remittances being effective on and after December 1, 1942.
In April 1943 Mrs. Baird, trustee, entered into an agreement with the owners of interests in the oil and gas lease with reference to the operation of the property.
The two trust estates filed income tax returns for 1943 on the cash basis. Income arising from the oil property in question during December 1942, and subsequent thereto, was reported by both trusts, the income accruing in December not being received until 1943.
Petitioner and his wife filed separate gift tax returns, Form 709, on or about March 14, 1944, disclosing that each party made a gift in trust on December 4, 1942, of one-half of an undivided one-fourth community interest, valued at $50,000, in the lease. Each donor claimed a specific exemption of $22,000 and an exclusion of $3,000, resulting in no ‘net‘ gift and no reported gift tax liability for either party. At the same time the trustee filed separate information returns for the calendar year 1942, Form 710, reporting gifts of the above interests to the two trust estates, completed as of the same date and for the same value. Petitioner, upon demand by a representative of the Commissioner, filed under protest a delinquent gift tax return for the calendar year 1943 in September 1945 covering the above transaction and as a part of the return denied all liability for a gift tax on the ground the gifts were completely made in 1942. Schedule A of the return contains the following:
+-----------------------------------------------------------------------------+ ¦Item¦ ¦Date of¦Value at ¦ ¦No. ¦Description of Gift, and Donee's Name and Address ¦Gift ¦Date of ¦ ¦ ¦ ¦ ¦Gift ¦ +----+-----------------------------------------------------+-------+----------¦ ¦ ¦All of the West one-half (W 1/2) of Tract Twenty-Four¦ ¦ ¦ ¦ ¦(24) of the owners subdivision No. Four (4), Block ¦ ¦ ¦ ¦1 ¦M121, T.C. Ry. Co. Survey, Hutchinson County, Texas, ¦ ¦ ¦ ¦ ¦containing 82.3 acres, being a fully developed Oil ¦ ¦ ¦ ¦ ¦and gas Lease. ¦ ¦ ¦ +----+-----------------------------------------------------+-------+----------¦ ¦ ¦To Regina Theresa Baird, Trustee ¦ ¦ ¦ +----+-----------------------------------------------------+-------+----------¦ ¦ ¦306 Amarillo Bldg., Amarillo, Texas. ¦ ¦ ¦ +----+-----------------------------------------------------+-------+----------¦ ¦ ¦1/4 undivided community interest of Regina L. ¦12-4-42¦$25,000.00¦ ¦ ¦Herrmann of the above oil and gas lease ¦ ¦ ¦ +----+-----------------------------------------------------+-------+----------¦ ¦ ¦1/4 undivided community interest of G. C. Herrmann of¦12-4-42¦25,000.00 ¦ ¦ ¦the above oil gas lease ¦ ¦ ¦ +----+-----------------------------------------------------+-------+----------¦ ¦(a) ¦Total ¦ ¦$50,000.00¦ +----+-----------------------------------------------------+-------+----------¦ ¦(b) ¦Less total exclusions not exceeding $3,000 for each ¦ ¦6,000.00 ¦ ¦ ¦donee (except gifts of future interests) ¦ ¦ ¦ +----+-----------------------------------------------------+-------+----------¦ ¦(c) ¦Total included amount of gifts for year ¦ ¦$44,000.00¦ +-----------------------------------------------------------------------------+
The Commissioner, pursuant to section 1000(d) of the Internal Revenue Code, included the full value of the community property so transferred in computing petitioner's gift tax liability for 1943. He disallowed petitioner's $6,000 exclusion on the basis that the gifts were of a future interest on property, and reduced the specific exemption from $44,000 to $30,000, all of which resulted in a stated ‘net‘ gift of $20,000. On the basis thereof, a deficiency in gift tax of $1,200 was determined.
OPINION.
ARUNDELL, Judge:
In the instant case the sole question to be determined is whether certain gifts in trust of an undivided community interest in a Texas oil and gas lease were completed in 1942 or 1943. Petitioner does not challenge the computation of the deficiency asserted by the respondent, if it is held herein that 1943 was the year in which the gift was consummated. There is no apparent dispute about the facts or that Texas law will determine when the title was transferred. The parties do disagree, however, as to whether the facts occurring in 1942 were legally sufficient to complete the gift in that year.
On the basis of the facts developed in the record, we have no hesitancy in concluding that valid written, express trusts were created in December 1942, and that the corpus of petitioner's trust was effectively delivered in 1942. Both the petitioner and his brother were anxious to protect their children against the instability of oil and gas operations, and they discussed and planned similar gifts in trust to accomplish this end. Gifts by the brother and his wife were completed in the fall of 1942 by executing their assignments of interest and trust instruments naming their eldest daughter as trustee. The petitioner and his wife, on the other hand, were delayed in the completion of their gifts because they desired to make special provision for their grandchildren.
However, early in December 1942 petitioner and his wife executed and acknowledged assignments of their community interest in the oil and gas lease, which conveyed such property in trust to their eldest daughter for the benefit of their children and grandchildren. The attorney to whom they delivered the conveyances mailed such instruments for recordation within the year. On December 1 and December 4, 1942, petitioner and his wife also executed express written trusts which fully set forth the terms of the gifts in trust. Before taking this stip petitioner had secured the consent of his eldest daughter to act as trustee and she had been advised in substance of the terms of the trust instrument.
Thereafter, petitioner duly advised the other oil operators of the gifts in trust made by him and his wife and directed them to make payment of the December 1942 income as well as all future income from oil runs to the trustee. Petitioner's daughter, as trustee, later joined with the other lease operators, including the trustee of the brother's trust, in an instrument setting forth the terms for subsequent operation of the lease. While these latter steps took place in 1943, but before the trustee signed the trust instruments in August of that year, they make clear that all of the interested parties regarded the transaction as fully completed by the steps taken in December of 1942. The grantors had fully relinquished all their control over the property and the trustee was exercising control over the corpus and receiving the income of the trusts.
In Taylor v. Sanford, 108 Tex. 340; 192 S.W. 661, the Supreme Court of Texas said that ‘If the instrument be so disposed of by (the grantor), whatever his action, as to clearly evince an intention on his part that it shall have effect as a conveyance, it is a sufficient delivery.‘ See also Davies v. Pegues (Tex. Civ. App.), 125 S.W.(2d) 642. Here, the requirements of Texas law that an interest in an oil and gas lease must be conveyed by a written instrument were fully met in December 1942 when the deed was signed and acknowledged, turned over to the attorney to be recorded, and by him mailed, within the year, to the county clerk for recordation. See Sloan v. Sloan's Administrator (Tex. Civ. App.), 117 S.W.(2d) 803; Dorman v. Ryan (Tex. Civ. App.), 293 S.W. 888; Russell v. Beckert (Tex. Civ. App.), 195 S.W. 607. Moreover, while under Texas law an express trust superimposed on such a conveyance need not be in writing, Knight v. Tannehill Bros. (Tex. Civ. App.), 140 S.W.(2d) 552; Miller v. Whittenburg (Tex. Civ. App.), 144 S.W. (2d) 381, here trust instruments were in fact fully drawn and signed by petitioner and his wife in 1942.
The fact that the trustee did not sign the trust instruments until August of 1943, although she had orally accepted the trusteeship and had entered upon her duties as trustee prior to that time, would appear to be an unimportant detail, for under the law of Texas a trustee who is also named as a direct beneficiary under the trust is presumed to accept the trust in the absence of a disclaimer. Lange v. Houston Bank & Trust Co. (Tex. Civ. App.), 194 S.W. (2d) 797. So, also, the acceptance of a gift, where beneficial, will be presumed in the absence of disclaimer. Taylor v. Sanford, supra.
The argument of the Commissioner, that the transactions were not completed until 1943 because the assignments were not recorded until that year and the trustee did not sign and acknowledge the trust instruments until 1943, would seem unimportant in the light of the facts as they appear in this case. We conclude that petitioner and his wife not only executed adequate written conveyances and made legal delivery thereof within the year 1942, but also created valid, express, written trusts within that year. It follows therefore that the Commissioner erred in determining a deficiency in gift tax for the calendar year 1943.
Reviewed by the Court.
Decision will be entered under Rule 50.