Opinion
No. 44832.
As Amended as of June 2, 1941.
David Barnett, of New York City, for plaintiff.
Elizabeth B. Davis, of Washington, D.C., and Samuel O. Clark, Jr., Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and LITTLETON, WHITAKER, JONES, and MADDEN, Judges.
Action by Grace E. Cockrell, as guardian of the person and estate of Clara G. Drewry, an incompetent person, against the United States, to recover the amount of gift taxes paid.
Judgment for plaintiff.
This case having been heard by the Court of Claims, the court, on the basis of the stipulation of facts and the report of a commissioner, makes the following special findings of fact:
1. On the 10th day of June 1935 the plaintiff, Grace E. Cockrell, was duly appointed guardian of the person and estate of Clara G. Drewry, an incompetent person, by an order of the Superior Court of the State of California, in and for the the County of Los Angeles, in a proceeding entitled "In the Matter of the Estate and Guardianship of Clara G. Drewry, an incompetent person," and that said petitioner thereupon duly qualified to act as such guardian.
2. At the time mentioned in finding 1 hereof, the plaintiff Grace E. Cockrell and the said Clara G. Drewry were both and still are residents of the City of San Marino, County of Los Angeles, State of California.
3. On June 14, 1933, Clara G. Drewry entered into an agreement dated September 9, 1932, with William M. Cobb and the Chase National Bank of the City of New York, as trustees, whereby she assigned and transferred to the trustees and their successors certain property described in a schedule annexed to said agreement, in trust.
This agreement in trust provided, insofar as is material to this case, as follows:
"In consideration of the premises and of the sum of One Dollar and of other good and valuable considerations paid to the Settlor by the Trustees, the receipt of which is hereby acknowledged, the Settlor does hereby bargain, sell, assign, and transfer to the Trustees and their successors, the property listed in the Schedule hereto annexed, to have and to hold the same and any other property of any kind which the Trustees may, pursuant to any of the provisions hereof, at any time hereafter hold or acquire (all of which property will be hereinafter referred to collectively as the Trust Estate) In Trust, upon the terms and conditions hereinafter set forth.
"First. The Trustees shall hold the Trust Estate, shall manage and administer it, shall collect the income thereof and shall dispose of the net principal thereof (hereinafter called the principal) and the net income thereof after deducting all expenses and commissions properly payable therefrom (hereinafter called the income) as follows:
"The income shall be paid to the Settlor during her life. Upon the Settlor's death the Trustees shall pay out of the principal, as it then exists, the funeral expenses of the Settlor. The balance of the said principal shall then be divided into two equal shares. One of such shares shall be paid to Harriet Peters, or if she is not then living, to her Executor or Administrator as part of her estate. Out of the remaining share there shall be paid the sum of Three thousand six hundred dollars ($3,600) to Ethel Porter Thompson, and the further sum of Three thousand six hundred dollars ($3,600) to Lida Broadus, the Settlor's maid, if she shall be in the service of the Settlor at the time of the Settlor's death. The balance of the said share, including the sum of Three thousand six hundred dollars ($3,600) last above mentioned in case the said Lida Broadus shall not be in the service of the Settlor at the Settlor's death, and the sum of Three thousand six hundred dollars ($3,600) given to the said Ethel Porter Thompson in case she shall not survive the Settlor shall be divided into five (5) equal parts if Nell Reeves Mann shall survive the Settlor, or into four (4) equal parts if the said Nell Reeves Mann shall not survive the Settlor. One of such parts shall be paid to Nell Reeves Mann if she shall survive the Settlor. One of such parts shall be paid to Y.S.B. Gray and his wife Fanny Gray, or the survivor of them, or in case neither of them shall survive the Settlor to the Executor or Administrator of the one of them who died last as part of his or her estate. One of such parts shall be paid to L.D. Gray and his wife, Mace Gray, or the survivor of them, or in case neither of them shall survive the Settlor to the Executor or Administrator of the one of them who died last as part of his or her estate. One of such parts shall be paid to David Gray, or if he shall not survive the Settlor to his Executor or Administrator as part of his estate, and the remaining one of such parts shall be paid to Elizabeth Gray, or if she shall not survive the Settlor to her Executor or Administrator as part of her estate.
"If in any year the net income of the Trust Estate, after commissions and expenses, shall be less than the sum of $12,000 the difference between such net income and the sum of $12,000 shall be paid to the Settlor from principal and no subsequent adjustment or payment from income to principal or payment by the Settlor shall be required in case the net income of the Trust Estate in a subsequent year or in subsequent years shall exceed the sum of $12,000. The Trustees are authorized to estimate the annual income in advance and to make payments from principal accordingly, and in case the actual annual income shall exceed the estimated annual income, nevertheless, the Settlor shall be entitled to retain all payments from principal made to her and no adjustment or payment by the Settlor or payment from income to principal shall be required.
"In case of illness of the Settlor or in case of some other personal emergency affecting her, the Trustees are authorized in their discretion to make additional payments from principal to the Settlor in such sums and at such times as they may determine. The determination of the Trustees that the Settlor is ill or is affected by some other personal emergency shall be conclusively binding upon all persons interested hereunder. The Trustees shall not be responsible for the application by the Settlor of any payment made to her.
"The Settlor shall be entitled to withdraw the sum of $25,000 from the principal of the Trust Estate upon filing her written request with the Trustees at any time after both of the real properties, known respectively as Camden Terrace, located near Cincinnati, Ohio, and The Bayonets, located at Daytona Beach, Florida, held or to be held by the Halifax Land and Investment Company, a Florida Corporation, have been sold and net cash proceeds of the sales to that amount have been received by the Trustees. The Settlor shall be entitled to make this withdrawal regardless of the fact that a loan or loans may have been made by the Trustees to the said Corporation.
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"All sums whatsoever received by the Trustees from James S. Drewry, J.S. Drewry Company, The Mutual Benefit Life Insurance Company of Newark, New Jersey, or any other corporation, partnership, or individual on account of any claims against or affecting The Mutual Benefit Life Insurance Company of Newark, New Jersey, hereby assigned or which may be hereafter assigned to the Trustees shall constitute principal of the Trust Estate. * * *
"Second. The Trustees shall receive, hold, administer, and dispose of as part of the Trust Estate and subject to all of the provisions of this agreement any additional property which the Settlor or any one for her account may hereafter transfer or set over to the Trustees with written instructions to hold the same under the terms of this agreement. * * *
"Third. The Trustees shall have the power and authority:
"(a) To retain in their discretion any securities or other property now or at any time hereafter received by them as part of the Trust Estate whether they are or are not legal investments for Trustees;
"(b) With any cash at any time held by them as principal to purchase any securities or other property legal as an investment for Trustees in the State of New York, but this provision is subject to the right of the Trustees to make loans as hereinbefore provided;
"(c) To pledge, sell for cash or on credit, convert, redeem, exchange for other securities or property of any kind, or otherwise dispose of any securities or any other property; either real or personal, at any time held by them and to execute and deliver any and all bills of sale and other instruments which in their opinion shall be necessary or proper to carry any such disposition into effect;
"(d) To exercise any conversion privilege and/or subscription right available in connection with any securities at any time held by them; to consent to the reorganization, consolidation, merger, or readjustment of the finances of any corporation, company or association or to the sale, mortgage, pledge, or lease of the property of any corporation, company, or association any of the securities of which may at any time be held by them and to do any act with reference thereto, including the exercise of options, making of agreements or subscriptions, and the payment of expenses, assessments, or subscriptions which they may deem necessary or advisable in connection therewith and to hold and retain any securities or other property which they may so acquire;
"(e) To vote, personally or by general or limited proxy, any shares of stock which may be held by them at any time, and similarly to exercise, personally or by general or by limited power of attorney, any right appurtenant to any securities held by them at any time;
"(f) To borrow money for the purpose of making subscriptions, exercising options, paying assessments, and for the accomplishment of any other purpose of the trust hereby created.
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"Seventh. The Trustees shall have such additional powers as the Settlor by any future instrument in writing delivered to the Trustees may grant to them, the right to grant such powers being hereby expressly reserved to the Settlor.
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"Ninth. The Trustees are authorized to determine any question which may arise as to what constitutes income and principal as between the life tenant hereof and the remaindermen, and such determination shall be conclusively binding upon all persons interested hereunder.
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"Eleventh. This agreement and the trust created hereby shall be construed and regulated by the laws of the State of New York, and the Trustees shall not be required to account in any court other than one of the courts of that State."
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4. On April 28, 1934, Clara G. Drewry entered into a supplemental agreement with the trustees above mentioned, adding to the principal of the trust certain claims of hers against the Mutual Benefit Life Insurance Company arising out of agreements of the company with her deceased husband, Lucius D. Drewry, and Drewry and Oehmig, a partnership of Chattanooga, Tennessee. This agreement provided that this addition to the trust was to be held and administered by the trustees in accordance with all the terms and conditions of the trust agreement dated September 9, 1932.
5. On March 15, 1934, Clara G. Drewry filed a gift tax return for the calendar year 1933. This return showed gross gifts in the amount of $213,467.52, set forth as follows under schedule B thereof: Gross gifts made during calendar year for which this return is filed
SCHEDULE B. — ------------------------------------------------------------------------------------------ Item | Description of Property Constituting Gift, | Date of | Value at Date No. | and Name and Address of Donee | Gift | of Gift ------------|----------------------------------------------|------------|----------------- | Property assigned to William Cobb and | | | The Chase National Bank of the City of | | | New York as Trustees under agreement | | | dated 9/9/32, as follows: | | | | | 1 | 900 shares Halifax Bulb and Flower | | | Farms, Inc., Capital Stock, $100 Par | June 14 | $80,561.67 2 | 100 shares Halifax Land | | | and Investment Co. Capital | | | Stock $100 Par ........... $139,079.00 | | | Less portion to be returned 25,000.00 | | | ____________ | June 14 | 114,079.00 3 | Certain Commissions on life-insurance | | | policies received from the Mutual | | | Benefit Life Insurance Company of | | | Newark (N.J.) at various times during | | | the year in Cash ..................... | | 18,826.85 | | |_________________ | Total .............................. | .......... | 213,467.52 ------------------------------------------------------------------------------------------ On March 20, 1934, Clara G. Drewry paid a gift tax of $7,750.39, the amount shown due on the return, to the Collector of Internal Revenue for the Second District of New York, who transferred said sum to the Collector of Internal Revenue for the District of Florida.6. On March 25, 1935, Clara G. Drewry filed with the Collector of Internal Revenue for the District of Florida a claim for a partial refund of the gift tax paid for 1933 in the amount of $7,750.39 on the ground that the transfer in trust of the said properties was not an outright gift but merely a gift of a remainder interest subject to the life estate of Clara G. Drewry. This claim for refund was allowed in the amount of $3,642.50 and a certificate of overassessment dated July 10, 1936, issued for that amount. This certificate showed that the refund resulted from reducing the amount of the gross gifts shown on the return to the value of the present right to receive the corpus of the trust upon the death of Clara G. Drewry. The amount shown due on the certificate of overassessment was refunded on October 4, 1936.
7. On March 15, 1935, Clara G. Drewry filed a gift tax return for the calendar year 1934 showing gross gifts of $25,417.27, representing the value of the remainder interest of the amount of $37,816.56, which amount represented commissions on life insurance policies received from the Mutual Benefit Life Insurance Company of Newark, New Jersey, at various times during the year in cash. On that same date she paid a gift tax of $1,516 to the Collector of Internal Revenue for the Second District of New York who transferred said sum to the Collector of Internal Revenue for the District of Florida. Thereafter the Commissioner of Internal Revenue notified Clara G. Drewry of a proposed deficiency in gift tax for the year 1934 in the amount of $136.12, resulting from an increase in the value of property transferred in trust, as set forth in finding 3, determined for the calendar year 1934. The amount of this deficiency, together with interest in the sum of $13.14, a total of $149.26, was paid by Clara G. Drewry on October 31, 1936.
8. On March 16, 1936, Clara G. Drewry filed a gift tax return for the calendar year 1935, showing gifts to the trustees under the trust mentioned in finding 3, as follows:
Cash ................................ $ 2,633.97 Certain commissions on life insurance policies received from the Mutual Benefit Life Insurance Co. of Newark (N.J.) at various times during 1935 .............................. 39,394.83 __________ 42,028.80 Less: Payments to Donor from principal pursuant to Article First of agreement dated
9/9/32 ............................ 10,000.00 __________ 32,028.80
The total of gross gifts shown was the value of the remainder interest in the above sum of $32,028.80, which amounted to $21,527.20.
On that same date she paid a gift tax in the amount of $1,937.45 to the Collector of Internal Revenue for the Second District of New York.
9. On May 29, 1936, the Internal Revenue Agent in Charge of the Second New York Division of the Treasury Department advised the Chase National Bank, as one of the Trustees of said trust, as follows: "Examination of the trust instrument dated September 9, 1932, a copy of which is enclosed, disclosed such trust to be revocable under the purview of Sections 166 and 167 of the 1934 Act [26 U.S.C.A. Int.Rev. Code, §§ 166, 167], and as provided all income accruing to the trust is taxable to the Grantor of such trust."
10. Additional deficiencies in income tax for the years 1934 and 1935 were thereafter assessed against Clara G. Drewry on the basis that the accumulated income of the trust was taxable to her in addition to the amount actually distributed and Clara G. Drewry paid such additional deficiencies, together with interest thereon.
11. On January 13, 1937, the plaintiff filed with the Commissioner of Internal Revenue a claim for refund of gift tax paid by Clara G. Drewry for the period from January 1, 1934, to June 30, 1935, in the amount of $5,760.01. In a statement attached to this claim it was stated that, in view of the fact that a deficiency notice had been issued to Clara G. Drewry for the year 1934 proposing an additional assessment of income tax for that year resulting from the inclusion in income of all the income of the trust, and that whereas at the time the claimant paid the gift tax it was under the belief that the trust was irrevocable, and that pending final determination of the income-tax matter it was the opinion of the claimant that, should it be found that additional income taxes were due, the gift tax paid should be refunded, and that for these reasons the claim was being filed to protect the claimant against the running of the statute of limitations in the event of an unfavorable ruling regarding the additional income-tax liability.
12. On March 2, 1937, the plaintiff filed with the Commissioner of Internal Revenue a claim for refund of gift tax paid by Clara G. Drewry on March 20, 1934, March 15, 1935, and March 15, 1936, in a total amount of $7,710.60. In a statement attached to this claim it was stated that the gift taxes were paid on the theory that the transfers were transfers in trust subject to the gift-tax regulations; that since payment the Bureau of Internal Revenue had determined a deficiency in income taxes, "holding that the Trust so created is revocable, and, therefore, all income is chargeable to the grantor"; and that "Consequently, pending determination on said deficiency notice, this claim is filed, since it will be impossible to retain the gift taxes paid in if the Trust is proved revocable."
13. On January 31, 1938, plaintiff filed with the Commissioner of Internal Revenue at Washington, D.C., a claim for refund of gift taxes paid by Clara G. Drewry on March 15, 1935, in the amount of $1,665.26. In a statement attached to the claim it was claimed that in view of the letter from the Bureau dated May 29, 1936, advising that the trust was not an irrevocable trust there were no gift taxes due on the transfers and, therefore, the plaintiff was entitled to a refund of the amount paid.
14. On January 31, 1938, the plaintiff filed with the Commissioner of Internal Revenue at Washington, D.C., a claim for refund of gift taxes paid by Clara G. Drewry on March 15, 1936, in the amount of $1,937.45. The grounds set forth in the statement attached to this claim were the same as those set forth in the claim filed on the same date referred to in finding 13.
15. On December 10, 1937, the Commissioner of Internal Revenue advised the plaintiff by registered mail that the claims for refund of $5,760.01 gift taxes paid for the years 1933 and 1934 and claim for $7,710.60 gift taxes paid for the calendar years 1933, 1934, and 1935 were rejected. In this letter it was stated that it was the position of the Bureau that the trust instrument and the subsequent addition of other property represented consummated gifts and as such were taxable. It was further stated that since the gift tax was a specific tax distinct and separate from other taxes, such as income tax, the assessment of one tax did not necessarily preclude the assessment of another and different tax.
16. On March 9, 1938, the Commissioner of Internal Revenue advised the plaintiff by registered mail that the amended claims for refund for the calendar years 1934 and 1935 were rejected. It was stated that as the donor in trust had relinquished all right or interest in the remainder, which was the amount taxed, she had made a gift to that extent.
17. There has been no assignment or transfer of the aforesaid claims or any part thereof, except to the plaintiff herein by reason of her appointment as guardian of the person and estate of the said Clara G. Drewry, an incompetent person, as aforesaid.
The question involved in this case is whether or not the transfer in trust of certain property by Clara G. Drewry on September 9, 1932 is subject to the gift tax imposed by section 501 of the Revenue Act of 1932, 47 Stat. 169, c. 209, 26 U.S.C.A. Int.Rev. Acts, page 580.
The trust provided that the income therefrom should be paid to the settlor during her life, and, in addition, if in any one year such income should fall below $12,000 the trustees were required to make up the deficit from the corpus of the estate, and such encroachment upon the corpus was not to be repaid even if the income of future years exceeded $12,000. The trust also provided that in case of illness of the settlor or in any other personal emergency, the trustees were authorized in their discretion to make such additional payments from the principal as in their discretion they might think necessary. Upon the death of the settlor, the remainder was to be distributed to certain named beneficiaries.
The seventh paragraph of the trust reads as follows: "The Trustees shall have such additional powers as the Settlor by any future instrument in writing delivered to the Trustees may grant to them, the right to grant such powers being hereby expressly reserved to the Settlor."
In Estate of Sanford v. Commissioner, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20, the Supreme Court held that a gift was not complete and, therefore, not subject to the tax, where the power remained in the settlor either to revoke the trust or to alter the disposition of the property in any way, whether for his own benefit or not. Such power is plainly reserved under the above-quoted paragraph of the trust instrument. Under it the settlor might grant power to the trustees to change the beneficiaries and their distributive shares, or even to pay over the entire corpus of the property to the settlor, on certain contingencies. So long as this power remained in the hands of the settlor, the remaindermen could never be sure what interest in the trust property, if any, they might eventually receive.
It is unnecessary to consider the effect of the power granted the trustees to encroach upon the corpus of the estate for the benefit of the settlor, since we think it clear that under the authority of Estate of Sanford v. Commissioner, supra, and cases there cited, the seventh article of the trust makes the gifts incomplete and not subject to the tax.
It results that the plaintiff is entitled to recover from the defendant $7,710.60, with interest as provided by law on $4,107.89 from March 20, 1934; on $1,516.00 from March 15, 1935; on $149.26 from October 31, 1936; and on $1,937.45 from March 16, 1936. It is so ordered.