Opinion
Docket No. 22098.
Promulgated May 23, 1950.
1. Petitioners' decedent in 1938 irrevocably assigned four insurance policies on his life to his wife. At the end of 1942 he transferred by gift to his wife his community one-half interest in certain oil leases. Until 1943 decedent paid the premiums on the policies. From 1943 to his death in 1946, premiums on such policies were paid with income derived from the property transferred by him to his wife. Held, premiums paid in 1943 and thereafter were indirectly paid by decedent and the amount received on such policies at death attributable to such premiums is includible in decedent's gross estate under section 811 (g) (2), I. R. C., as amended by section 404 (a), 1942 Act.
2. Decedent and wife, domiciled in Texas, executed in 1937 and 1938 five trust agreements for the benefit of their daughters, under the terms of each of which decedent had the power at any time to terminate the trust and deliver the trust estate to the beneficiary or beneficiaries then entitled thereto. From 1937 to 1942, inclusive, they transferred as gifts certain community property to such trusts. Decedent died on October 22, 1946. Held:
(1) Transfers by decedent and wife to the trusts of community property were in substance and effect transfers by decedent, the husband under Texas law having exclusive power of control and disposition of community property, absent fraud against the rights of the wife. Furthermore, under section 811 (d) (5) of the code, such transfers must be considered as having been made by decedent.
(2) Value at death of five trust estates, including not only value of decedent's one-half interest in community property originally transferred, as conceded by petitioners, but also value of the wife's one-half interest in community property originally transferred, and also value of properties acquired with trust income, are includible in decedent's gross estate, since decedent's power to terminate extended to entire trust estates and death of decedent completed inter vivos transfers.
(3) Settling of gift tax liability for 1937 of decedent's wife by closing agreement does not preclude the inclusion in decedent's gross estate of the value at his death of wife's one-half interest in community property originally transferred to trusts.
(4) Section 811 (d) (5) of the code does not violate the due process clause of the Fifth Amendment to the Constitution of the United States.
George E. B. Peddy, Esq., for the petitioners.
A. T. Akin, Esq., and Joseph P. Crowe, Esq., for the respondent.
The Commissioner determined a deficiency in estate tax in the amount of $655,653.30. The questions to be determined are whether the Commissioner erred in including in the value of the decedent's gross estate (1) an additional amount of $30,833.34 as insurance, and (2) the value of the properties of five trust estates in the aggregate amount of $1,014,628.56.
It is agreed by the parties that credits allowable for gift taxes and estate and inheritance taxes shall be adjusted upon recomputation under Rule 50.
The case was submitted on a stipulation of facts and exhibits attached thereto. The stipulated facts are so found.
FINDINGS OF FACT.
The petitioners are independent executors of the estate of E. A. Showers, deceased (hereinafter referred to as decedent), who died testate on October 22, 1946, in Harris County, Texas.
At the time of his death all property owned by decedent, except certain real estate in Hidalgo County, Texas, was community property of the decedent and his surviving wife, Mary Elizabeth Showers (now Mrs. Elizabeth McEachern Scherck).
Three children were born to decedent and his wife, namely, Ann Showers, born July 24, 1928; Betty Showers, born November 10, 1930; and Nancy Showers, born December 28, 1936. The three children survive the decedent.
The estate tax return, filed with the collector for the first district of Texas, at Austin, Texas, on or about December 19, 1947, reflected a net estate of $2,003,929.53 for basic tax, a net estate of $2,043,929.53 for the additional tax; and total estate tax payable of $667,611.11, check for which accompanied the return.
On or before February 18, 1938, four insurance policies, numbered 347986, 347985, 179100, and 286585, on the life of the decedent in the aggregate amount of $105,250, were irrevocably assigned and made payable to the beneficiary, Mary Elizabeth Showers, wife of decedent.
On December 23, 1942, decedent transferred by gift to his wife, Mary Elizabeth Showers, his one-half community interest in certain interests in certain oil and gas leases which were a part of the community property of decedent and his wife. On a gift tax return filed for the year 1942, decedent reported a value of $20,550 for this gift. The income from the properties conveyed to his wife by decedent was deposited in a separate account in the National Bank of Commerce, Houston, Texas. The total of such income so deposited from January 1, 1943, through December 31, 1946, was $51,248.65. From January 1, 1943, through December 31, 1946, there was expended from such account, for operating expense, general expense, and ad valorem taxes on leases, the amount of $11,308.15; a gift to the daughters of decedent and his wife of $2,250 in each of the years 1943, 1944, and 1945, or a total of $6,750; the amount of $16,915.60 for the purchase in April and May, 1946, of certain shares of stock; and the aggregate amount of $8,647.60 for premiums paid in 1943 to 1946, inclusive, on the four insurance policies assigned by decedent to his wife. All the checks drawn on this account for the payment of such premiums were signed by the decedent under the printed name, "Mary Elizabeth Showers."
Prior to January 10, 1941, the decedent paid premiums on the four insurance policies in the total amount of $17,168.80, and subsequent to January 10, 1941, he paid premiums thereon in the total amount of $4,301.20.
Upon audit of the estate tax return, the Commissioner increased the value of insurance reported and included in the value of the gross estate, with explanation stated in the notice of deficiency as follows:
Schedule D of return Returned Determined Item 1, Policy No. 347986 ............. $4,208.33 $12 625 Item 2, Policy No. 347985 ............. 8,333.33 25,000 Item 3, Policy No. 179100 ............. 2,500.00 7,500 Item 4, Policy No. 286585 ............. 500.00 1,250 Added item, Policy No. K-100204 U.S. . 10,000 Items 1 to 4, inclusive, have been determined understated as returned, which returned amounts have been increased on amount of premiums paid by decedent, either directly or indirectly, after January 10, 1941. It is held that the added item shown above representing a U.S. Government policy is taxable in the full amount of its $10,000.00, face value.The "Added item" of $10,000 is not in controversy.
On April 1, 1937, the decedent and his wife created a trust, designated as the "E. A. Showers Trust," for the benefit of their daughters Ann and Betty Showers, by the execution of a trust instrument conveying to the decedent, as trustee, certain royalty and mineral interests therein described and cash in the amount of $688.44, all of which property so conveyed was community property of the decedent and his wife. The decedent, as trustee, was given "full, complete and unrestricted power" of sale or other disposition of the trust estate and investment of the proceeds thereof or of the income of the trust estate, together with the right, power, and authority to handle, control, and manage the trust estate in any manner he might see fit, limited only by the right of the beneficiaries, upon making proof that the estate was being wasted or dissipated by the trustee in any court having jurisdiction thereof, to have a receiver of the trust estate appointed by such court. The income of the trust was to be accumulated and become a part of the corpus.
The trust instrument provided that, if and when each child married or reached the age of 21 years, the trustee was to pay her $500 a month out of the income of the trust, and $20,000 out of the corpus to be used only for the purchase of a home. The trust was to continue until the youngest child reached the age of 35 years, or the survivor attained the age of 35 years, or both daughters died. If both of the daughters were living when the youngest reached the age of 35 years, the trust estate was to be divided between them, share and share alike. If either child died without issue, the whole of the trust estate was to be delivered to the survivor. If either child died leaving issue, the share to which the deceased child was entitled was to be delivered to her surviving issue. If both daughters died without issue, the trust estate was to vest in their heirs under the law of descent and distribution of the State of Texas. The trust instrument further provided, in part, as follows:
VII.
Said E. A. Showers, Trustee, shall have the right at any time to terminate the trust estate and deliver the trust estate to the beneficiary thereof, as hereinabove set forth, regardless of the age or condition in life of such beneficiary; provided, however, that upon the termination of the trust estate the portion to which any unmarried minor will be entitled shall be delivered to a duly qualified guardian of the estate of such minor; and provided further that no part of the trust estate shall be distributed to or vested in the grantors hereunder as a result of the exercise of the power to terminate the trust.
VIII.
The said E. A. Showers, Trustee, is hereby expressly given and granted full power and authority to appoing, [ sic] by a duly executed instrument in writing, a trustee or trustees to hold, manage and control the trust estate upon his death, and in the event the said E. A. Showers does not, by some proper instrument in writing, designate and appoint such trustee or trustees, then upon his death the trust estate shall vest in the executors or trustees named by him in his last will and testament, and such executors or trustees shall hold, manage and control the trust estate upon the identical terms and conditions hereinabove set forth.
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XII.
The right and power to amend this trust in order to convey greater and additional rights and benefits, if any such exist, to the beneficiaries, including the right to approve any alterations in any respect and to any extent at any time desired by the beneficiaries, is expressly reserved in the Grantors or surviving Grantor. If any alterations which may be desired by the beneficiaries are approved by the Grantors or the surviving Grantor, thereafter the rights and powers of all parties concerned will be the same as though the trust had been originally executed in the altered form. The Grantors hereby expressly surrender all right, and power to amend, modify and revoke this trust in so far as such amendment, alteration, modification or revocation would result in any benefit, direct or indirect, from the corpus of the trust or the income therefrom to the Grantors, or either of them.
All accounts of the trust were maintained at all times separate and apart from any other accounts of the decedent. All taxable income of the trust was reported on Forms 1041 and the tax was paid thereon out of trust funds. The Bureau of Internal Revenue has consistently held that net taxable income of the trust was taxable to the trust.
The decedent and his wife made cash gifts to the E. A. Showers Trust both prior to and subsequent to the date of the execution of the trust instrument, as follows:
1932 ............................ $506.81 1933 ............................ 1,818.38 1934 ............................ 8,228.86 1935 ............................ 9,737.53 1936 ............................ 5,396.18 1937 ............................ 7,906.69 --------- Total through 12/31/37 .... 33,594.45 1938 ............................ 7,274.32 --------- Total cash gifts .......... 40,868.77
The trust which was formally declared in the trust instrument of April 1, 1937, had acquired, prior to December 27, 1935, certain mineral interests in East Texas.
On January 31, 1945, the Commissioner proposed the assessment against the decedent and his wife of certain gift taxes, penalties, and interest, for gifts alleged to have been made in 1937 and 1938. The decedent and his wife each filed protests against such proposal on February 13, 1945. A conference was held in Dallas, Texas, on March 21, 1945, at which time it was agreed that the decedent and his wife each made net gifts aggregating $24,381.82, through December 31, 1937. This agreement was ratified by two "closing agreements" (Treasury Department Form 906) signed by the decedent and his wife on March 29, 1945, respectively. Such closing agreements were signed by the Commissioner of Internal Revenue on May 30, 1945, and were approved by the Acting Secretary of the Treasury on June 18, 1945. Each of the agreements is, in part, as follows:
WHEREAS, a controversy has arisen as to whether certain gifts were made in 1932 to 1937, inclusive, or entirely in 1937. It is determined that the taxpayer completed gifts in the aggregate of $24,381.82 in the year 1937, in trust for the primary use and benefit of Ann and Betty Showers,
Whereas, taxpayer and spouse set aside out of community funds during the years 1932 through and including 1937, cash aggregating $33,594.45, for the ultimate use and benefit of Ann and Betty Showers,
Whereas, the cash so set aside was used in the acquisition of a portion of the mineral interests described in trust instrument dated April 1, 1937, executed by taxpayer and spouse,
Whereas, it is agreed for the purpose of settlement of the Federal gift tax liability of the taxpayer that all gifts resulting from the above transactions were completed in 1937 and taxable for gift tax purposes during such year.
WHEREAS, this determination is hereby agreed to by said taxpayer;
NOW, THIS AGREEMENT WITNESSETH, That said taxpayer and said Commissioner of Internal Revenue hereby mutually agree that the matter so determined shall be final and conclusive (subject, however, to the provisions of section 3801 of the Internal Revenue Code) if this agreement is approved by the Secretary of the Treasury, the Under Secretary, or an Assistant Secretary, within one year from the date this agreement is signed by the taxpayer, except that if this agreement relates to any taxable period ending subsequent to the date of this agreement, it is subject to any change in or modification of the law enacted subsequent to said date and applicable to such taxable period.
The decedent and his wife each paid $647.18 in gift taxes, plus penalties and interest, on their respective gifts of $24,381.82.
The properties acquired by the E. A. Showers Trust prior to April 1, 1937, which are covered by the closing agreements dated March 29, 1945, had a value as of October 22, 1946, of $27,000.
In December, 1938, the decedent, joined pro forma by his wife, made gifts of cash of $5,000 to each of two trusts designated as the Nancy Showers Trust No. 1 and No. 1-A, and at the same time decedent's wife, joined pro forma by her husband, made gifts of cash of $5,000 to each of two trusts designated as the Nancy Showers Trust No. 2 and No. 2-A. The decedent and his wife each paid gift taxes on one-half of those gifts.
In each trust instrument the decedent was named as trustee. The decedent as trustee was granted full, complete, unlimited, and unrestricted power of investment, disposition, and management of the trust estate, limited only to the right of the beneficiary, upon making proof that the estate or any part thereof was being wasted or dissipated by the trustee in any court or tribunal having jurisdiction, to have a receiver of the trust estate appointed by such court. The income of each trust was to be accumulated and added to the corpus. Each trust provided for the payment to the beneficiary of $125 a month upon marriage or reaching the age of 21 years and $5,000 to be used only for the purchase of a home to be selected by her. Each trust was to continue until Nancy Showers reached the age of 35 years, at which time the trust estate was to be delivered to her. If she died before reaching the age of 35 years, leaving issue, the trust was to terminate and the whole of the trust estate was to pass to such issue. If she so died without issue, the trust estate was to pass and vest in her sisters, Ann Showers and Betty Showers, share and share alike, or to the survivor of them if one be dead without issue. If either or both of such sisters be dead leaving issue, the trust estate was to pass to such issue per stirpes and not per capita. If both sisters be dead without leaving issue, the trust estate was to pass to and vest in the heirs of Nancy Showers according to the law of descent and distribution of the State of Texas. Each trust further provided, in part, as follows:
VII
Said E. A. Showers, Trustee, shall have the right at any time to terminate the Trust Estate and deliver it to the beneficiary, or beneficiaries thereof as herein above set forth, regardless of age or condition in life of such beneficiary; provided, however, that upon the termination of the Trust Estate, the portion to which any unmarried minor will be entitled, shall be delivered to a duly qualified guardian of the estate of such minor, and provided further that no part of the trust estate shall be distributed to or vested in the grantor herein as the result of the exercise of the power to terminate the trust.
VIII
The said E. A. Showers, Trustee, is hereby given and granted full power and authority to appoint, by a duly executed instrument in writing, a trustee or trustees, to hold, manage and control the trust estate upon his death and in the event the said E. A. Showers does not by some proper instrument in writing designate [ sic] and appoint such trustee or trustees, then upon his death, the trust estate shall vest in the executors or trustees named by him in his last will and testament, and such executors or trustees shall hold, manage and control the trust estate upon the identical terms and conditions herein set forth.
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X
The right and power to amend this trust, in order to convey greater and additional rights and benefits, if any such exist, to the beneficiary, including the right to approve any alteration in any respect and to any extent at any time desired by the beneficiary, is expressly reserved in the grantor. If any alterations which may be desired by the beneficiary are approved by the grantor, thereafter the rights and powers of all parties concerned will be the same as though the trust had been originally executed in the altered form. The undersigned grantor hereby expressly surrenders all right and power to amend, modify and revoke this trust in so far as such amendment, alteration, modification or revocation shall result in any benefit, direct or indirect, from the corpus of the trust or the income therefrom to the grantor.
In the year 1938 the following gifts were made to trusts from community property:
Nancy Showers E. A. Trusts Nos. 1, Donor Showers, 1-A, 2, and Total trustee 2-A E. A. Showers .................... $3,637.16 $3,637.16 $7,274.32 Mary Elizabeth Showers ........... 10,000.00 10,000.00 20,000.00 ---------- -------------- ----------- Total ....................... 13,637.16 13,637.16 27,274.32 No gift tax returns for the year 1938 were filed by decedent and his wife. The Commissioner determined deficiencies of $733.96 and penalties of $183.41 for failure to file gift tax returns against the decedent and his wife, respectively. On June 30, 1945, decedent and his wife each signed waivers of restrictions against immediate assessment and collection of deficiencies and penalties in tax for the year 1938.In the year 1942 the following gifts of property were made from community property of decedent and his wife and reported on gift tax returns:
Value at date of gift Donee E. A. Showers Mary Elizabeth Showers E. A. Showers, trustee ..................... $9,838.00 $9,838.00 Nancy Showers Trust No. 1 .................. 1,950.00 1,950.00 Nancy Showers Trust No. 2 .................. 1,950.00 1,950.00 Nancy Showers Trust No. 1-A ................ 12,559.09 12,559.09 Nancy Showers Trust No. 2-A ................ 12,559.09 12,559.09 Mary Elizabeth Showers ..................... 20,550.00 None ------------- ------------- Total ................................. 59,406.18 38,856.18 Less exclusions ............................ 4,000.00 None ------------- ------------- Total included amount of gifts for year ............................. 55,406.18 38,856.18 Less specific exemptions ................... 40,000.00 38,856.18 ------------- ------------- Net gift for year .................... 15,406.18 None The decedent paid $821.01 in gift tax on filing his return for the year 1942 and also paid an additional assessment of $1,738.65, plus interest, attributable to recomputation of tax to include taxable gifts made in 1937 and 1938. Decedent's wife paid no gift tax, taking advantage of her specific exemption to the extent of $38,856.18.The aggregate value of the property transferred to the five trusts with respect to the value at date of gift; the value of the gift at date of death; the value of property at date of death acquired from income and funds borrowed, which were later repaid from income; and the value of the property constituting the corpora of the five trusts as of date of death are as follows:
Value, at date of death, of trust corpus acquired from — Value at date of gift Gift Income Total E. A. Showers Trust .. $75,713.96 $167,931.36 $636,278.07 $804,209.43 Nancy Showers Trust No. 1 ......... 8,900.00 26,086.44 27,792.22 53,878.66 Nancy Showers Trust No. 2 ......... 8,900.00 26,384.90 27,162.09 53,546.99 Nancy Showers Trust No. 1-A ....... 30,118.18 30,338.11 24,447.92 54,786.03 Nancy Showers Trust No. 2-A ....... 30,118.18 29,347.61 18,859.84 48,207.45 ----------- ----------- ----------- ------------- Total ............ 153,750.32 280,088.42 734,540.14 1,014,628.56 Under the laws of the State of Texas, all of the property transferred to the five trusts involved herein was community property of the decedent and his wife, Mary Elizabeth Showers.In determining the estate tax deficiency involved herein, the Commissioner increased the reported value of the gross estate by the amount of $1,014,628.56. The explanation for the adjustment given in the notice of deficiency is as follows:
Returned Determined Item 1, Nancy Showers Trust No. 1 ............... None $53,878.66 Item 2, Nancy Showers Trust No. 1-A ............. None 54,786.83 Item 3, E. A. Showers Trustee ................... None 804,209.43 Item 4, Nancy Showers Trust No. 2 ............... None 53,546.99 Item 5, Nancy Showers Trust No. 2-A ............. None 48,207.45 Items 1, 2, 3, 4 and 5 are held subject to tax as the grantor trustee reserved the right to terminate each trust and to shift the economic benefits, at his discretion. The decedent's will, executed on April 27, 1943, after providing for several bequests, gave the residue of the estate in trust for the benefit of decedent's wife and three daughters. The income of the testamentary trust was to be distributed at the rate of $12,000 a year to the wife and $4,000 a year to each daughter. The remainder of the income was to be added to the corpus. If any of the daughters died without issue, her share of the income was to be paid to decedent's wife; if any issue survived, such issue was entitled thereto. After the death of the wife, all payments of income from the testamentary trust as provided were to be made to decedent's daughters, share and share alike, until the youngest reached the age of 21 years, at which time distribution of the whole estate was to be made to them or the survivors or survivor thereof and the issue, if any, of any deceased daughter.The will further provided, in part, as follows:
(d) I have heretofore executed a trust agreement establishing a trust for the use and benefit of two of my daughters, wherein I have provided that these two daughters shall share equally in the income from said trust estate and in the corpus of said trust estate upon its dissolution and termination. I have also executed trust agreements establishing trusts for the use and benefit of my youngest daughter, Nancy Showers. If for any reason, upon final distribution of said trust estate or trust estates, either of my three daughters shall receive more than either of the others, my Trustees under this will shall make such distribution of the income and corpus of my estate under this will as will equalize the distributive shares of my three daughters in the combined estates, so that each of my three daughters shall receive an equal share in said trust estate, or trust estates, and in my estate taken and considered as a whole.
The will also provided that the terms thereof "cover and include my separate property as well as all community property of myself and my wife," but that if the wife elected not to take under the will, but to take her part of the community property, then in that event his separate estate and his portion of the community property was to be delivered to the trustees named and administered by them for the sole benefit of his daughters.
The decedent's wife elected not to take under the will.
OPINION.
The first question to be determined is whether the Commissioner erred in increasing by the amount of $30,833.34 the value of $15,541.66 reported in the estate tax return of four insurance policies on the life of the decedent.
By section 404 (a) of the Revenue Act of 1942, effective October 21, 1942, section 811 (g) (2) of the Internal Revenue Code was amended to provide, in part, that proceeds of life insurance shall be included in the value of the gross estate of decedent receivable by all beneficiaries, other than the executor or administrator of decedent, to the extent of the amount receivable as insurance under policies upon the life of the decedent:
* * * (A) purchased with premiums, or other consideration, paid directly or indirectly by the decedent, in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance, * * *
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(4) COMMUNITY PROPERTY. — For the purposes of this subsection, premiums or other consideration paid with property held as community property by the insured and surviving spouse under the law of any State, Territory, or possession of the United States, or any foreign country, shall be considered to have been paid by the insured, except such part thereof as may be shown to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse; * * *
In reference to the amendment, the House Committee and Senate Committee reports state, in part, as follows:
H. Rept. No. 2333, 75th Cong., 2d sess. (1942-2 C. B. 372, 490-1) and S. Rept. No. 1631, 75th Cong., 2d sess. (1942-2 C. B. 504, 676-7).
The inclusion in the gross estate of proceeds which are payable to beneficiaries other than the executor is to be determined for the purposes of this section by criteria set forth therein. These criteria are (1) the payment of premiums or other consideration by the decedent for the insurance, and (2) incidents of ownership possessed by the decedent at death. If either of these criteria is satisfied the proceeds are includible in the gross estate. The section provides with respect to the premium payments test that insurance purchased with premiums, or other consideration, paid directly or indirectly by the decedent, shall be included in the gross estate in proportion that the amount so paid by the decedent bears to the total premiums paid for the insurance.
* * * * * * *
Payments of premiums or other consideration by the decedent include payments made by him directly or indirectly. This provision is intended to prevent avoidance of the estate tax and should be construed in accordance with this objective. For example, if the decedent transfers funds to his wife so that she may purchase insurance on his life, and she purchases such insurance, the payments are considered to have been made by the decedent even though they are not directly traceable to the precise funds transferred by the decedent. [Emphasis supplied.]
The petitioners contend that the premiums which earned the $30,833.34 of insurance sought to be included in the value of the gross estate of decedent were paid with the separate funds of the wife of decedent, who was the beneficiary and owner of the policies involved by virtue of an irrevocable assignment from the decedent, and were not paid directly or indirectly by the decedent.
The respondent contends that, where income of property transferred by a decedent to his wife is used to pay premiums on life insurance policies, the payments of the premiums are made indirectly by the decedent. He argues that the contention of petitioners is one based upon the refinements of title, and that the facts, viz, (a) the transfer by the decedent to his wife made ten days after the effective date of the 1942 Act, which transfer was the only transfer ever made to the wife by decedent; (b) the income from the property so transferred was used to pay the premiums and make gifts to the daughters of decedent and his wife; and (c) the checks in payment of the premiums were all signed by the decedent, are significant and prove that the premiums were indirectly paid by decedent.
The term "indirect" is defined in Webster's New International Dictionary (1943), in part, as follows:
Not direct; specif.: (a) Not straight or rectilinear; deviating from a direct line or course; circuitous; oblique; as, an indirect road. * * * (b) Not straightforward; dishonest; tending to mislead. * * * (c) Not leading to an aim or result by the plainest course or method or by obvious means; roundabout; as, an indirect accusation or answer; an indirect proof. (d) Not resulting directly from an act or course, but more or less remotely connected with, or growing out of it; as, indirect results.
The decedent on or before February 18, 1938, irrevocably assigned to his wife four insurance policies issued in prior years on his life. After such assignment the decedent continued to pay the premiums on such policies. Presumably, the premiums were paid with community funds. It is stipulated that at the time of his death all property owned by decedent, except certain real estate in Hidalgo County, Texas, was community property of the decedent and his surviving wife. Whether rents or revenues were received from the Hidalgo County realty is not shown. However, under the Texas law, rents and revenues received from separate property during coverture become the community property of the husband and wife. McFadden v. McFadden, 213 S.W.2d 71; Marshall v. Smith, 199 S.W.2d 555; Ragsdale v. Ragsdale, 172 S.W.2d 381; affd., 179 S.W.2d 291. After the effective date of the Revenue Act of 1942 (October 21, 1942), the amount receivable as insurance was includible in the estate of decedent if the premiums were paid with community funds. On December 23, 1942, the decedent transferred to his wife his one-half community interest in certain interests in oil and gas leases which were a part of their community property. The income from such property was deposited in a separate bank account. It is reasonable to assume from the fact that the decedent continued to pay the premiums after the irrevocable assignment of the policies to his wife, and from the fact that he, in December, 1942, transferred property to her, together with the income therefrom, which thereafter constituted her separate property, that the wife theretofore had no separate funds from which to pay such premiums and that, there being no evidence to the contrary, the transfer was made to provide her with separate funds for that purpose.
In so far as the record discloses, the wife never exercised any control over the property given to her by the decedent or over the bank account in which the income therefrom was deposited. See art. 4614, Vernon's Civil Statutes of the State of Texas, Ann. The fifteen checks drawn on such account to pay the premiums during 1943 to 1946, inclusive, were all signed by the decedent. There is no evidence showing that the wife ever signed any check drawn on the account. Expenses and taxes incurred in connection with the property were paid out of such account, as well as certain gifts to the daughters of decedent and his wife in 1943, 1944, and 1945. The remaining income was permitted to accumulate until in April and May, 1946, when certain purchases of securities were made. The record fails to show by whom such purchases were made or whether the securities were purchased in the name of the wife. By his right to issue checks against the bank account, the decedent retained and had control over the funds therein. He exercised that control to pay the premiums on the policies assigned by him to his wife.
ART. 4614. Wife's separate property.
* * * The wife shall have the sole management, control, and disposition of her separate property, both real and personal; provided however, the joinder of the husband in the manner now provided by law for conveyances of the separate real estate of the wife shall be necessary to the incumbrance or conveyance by the wife of her lands, and the joint signature of the husband and wife shall be necessary to a transfer of stocks and bonds belonging to her or of which she may be given control by this law.
Instead of continuing to pay the premiums out of community funds, the premiums were paid in 1943 to 1946, inclusive, from income derived from property transferred by the decedent to his wife. That the property transferred by decedent to his wife and the income therefrom became the separate property of the wife, as contended by the petitioners, is not determinative. The transfer by the decedent of property to enable his wife to pay the premiums, the use of the income from the property transferred for the payment of the premiums, and the right retained by the decedent to issue checks against the account, all indicate the adoption of a circuitous and roundabout method for the payment of the premiums, ostensibly out of the separate funds of his wife, but indirectly from property transferred to her by the decedent. Since the decedent furnished the wherewithal, he indirectly paid the premiums. See Estate of Albert Dudley Saunders, 14 T.C. 534.
In our opinion, under all the facts and circumstances, the premiums paid on the insurance policies involved in 1943 to 1946, inclusive, were "paid * * * indirectly by the decedent" within the purview of section 811 (g) (2) of the Internal Revenue Code as amended by section 404 (a) of the Revenue Act of 1942. The increase in value by the Commissioner of insurance includible in decedent's gross estate in the amount of $30,833.34 is therefore approved.
The next question to consider is whether the Commissioner erred in including in the value of decedent's gross estate the value of the trust corpora of five trusts as of the date of his death of $1,014,628.56. One trust was set up for the benefit of two daughters and four trusts for the benefit of the third daughter.
It is the Commissioner's position that, since the transfers of community property were made by the decedent and his surviving spouse under the laws of the State of Texas, the transfers must be considered as having been made by the decedent under section 402 (a) of the Revenue Act of 1942, adding subsection (5) to section 811 (d) of the Internal Revenue Code, and, as decedent had the power to terminate the trusts at his election and deliver the trust estates to the beneficiaries, the transfers were revocable transfers and includible in decedent's gross estate under section 811 (d) (1) of the Internal Revenue Code.
SEC. 402. COMMUNITY INTERESTS.
(a) * * *
* * * * * * *
(5) TRANSFERS OF COMMUNITY PROPERTY IN CONTEMPLATION OF DEATH, ETC. — For the purposes of this subsection and subsection (c), a transfer of property held as community property by the decedent and surviving spouse under the law of any State, Territory, or possession of the United States, or any foreign country, shall be considered to have been made by the decedent, except such part thereof as may be shown to have been received as compensation for personal services actually rendered by the surviving spouse or derived originally from such compensation or from separate property of the surviving spouse. [Repealed by section 351, Revenue Act of 1948, effective with respect to estates of decedents dying after December 31, 1947. Applicable here by reason of death in 1946.]
SEC. 811. GROSS ESTATE.
* * * * * * *
(d) REVOCABLE TRANSFERS —
(1) TRANSFERS AFTER JUNE 22, 1936. — To the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise, where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power (in whatever capacity exercisable) by the decedent alone or by the decedent in conjunction with any other person (without regard to when or from what source the decedent acquired such power), to alter, amend, revoke, or terminate or where any such power is relinquished in contemplation of decedent's death.
The petitioners concede that, under section 811 (d) (1) of the Internal Revenue Code, as construed by the Supreme Court in Commissioner v. Holmes' Estate, 326 U.S. 480, those specific properties transferred by the decedent and those properties acquired with cash given to the trusts by the decedent from his one-half of the community property, having a value at the time of the death of decedent of $134,047.91, are includible in the value of his gross estate.
The petitioners contend, however, that (1) the value at the date of decedent's death of the gifts made by the wife out of her one-half community interest and (2) the value at the date of decedent's death of the properties acquired by the several trusts with trust income and with borrowed funds later repaid from trust income ($746,532.74) are not includible in the value of the gross estate of decedent under section 811 (d) (1). It is argued that, since all the properties transferred to the several trusts consisted of community property, and since under the law of Texas the wife is clothed with the right and power to make valid gifts of her interest in community property, decedent could not make a gift of his wife's interest in such community property, citing Allen v. Brewster, 172 S.W.2d 192; hence, one-half of the gifts and transfers to the several trusts were made by the decedent and one-half by his wife. It is argued, further, that none of the properties, acquired by the several trusts with the income of the trusts were ever owned by the decedent; hence, none of them could have been transferred by him in the sense in which that term is expressed and set forth in section 811 (d) (1).
Under the law of Texas the wife has a present vested interest in the community property equal to that of her husband, but during coverture the husband has the exclusive power of control and disposition of the property as long as he discharges his obligation as head of the family. Absent fraud against the rights of his wife, he can dispose of the community funds as he sees fit. Vernon's Texas Ann. Civ. Stat., art. 4619, sec. 1; Hopkins v. Bacon, 282 U.S. 122; United States v. Rompel, 326 U.S. 367; Herder v. Helvering, 106 F.2d 153; certiorari denied, 308 U.S. 617; rehearing denied, 308 U.S. 639; Magnolia Petroleum Co. v. Still, 163 S.W.2d 268; Ames v. Ames, 188 S.W.2d 689; Arbuckle v. Arbuckle, 214 S.W.2d 281; Estate of Mrs. Matney Dyer Lucey, 13 T.C. 1010, 1019; Charles I. Francis, 8 T.C. 822, 825-827, 829, 831. In Arbuckle v. Arbuckle, supra, the disposition of community property by the wife was held effective, but only because the evidence showed that the wife made disposition thereof as the husband's agent, with his full knowledge and consent. As stated in Paul's Federal Estate and Gift Taxation, ¶ 7.31, pp. 388-389:
* * * In theory husband and wife are equal co-owners of the community property during the continuance of the marital relationship. But the powers of management, control and disposition, which are the normal fruits of ownership under the common law, are concentrated in one spouse, the husband. Restrictions imposed upon the exercise of his powers are essentially negative in character and do not deprive him of his central position in the community.
Allen v. Brewster, supra, relied upon by petitioners to support their contention that the decedent could not make a gift of his wife's interest in the community property, is of doubtful authority. In that case a death benefit certificate on the husband's life was purchased with community funds and the wife was named as beneficiary. The husband, after abandoning his wife, and without her knowledge, induced the fraternal society which had issued the certificate to change the beneficiary and designate as beneficiary another woman, named Patsy Allen. After the death of the husband, both the widow of decedent, individually and as administratrix of his estate, and Patsy Allen asserted claims to the death benefit. Judgment for the widow of decedent rendered by the District Court was affirmed by the Court of Civil Appeals on the grounds (1) that the attempt of the husband to dispose of community property was a fraud upon the rights of his wife and (2) that Patsy Allen had no insurable interest in the life of decedent. However, the Supreme Court of Texas reversed the judgments of the lower courts and rendered judgment in favor of Patsy Allen for the proceeds of the certificate, holding that one named by insured as beneficiary in a death benefit certificate issued by a fraternal benefit society who had no insurable interest in insured's life could recover the proceeds of such certificate. Allen v. Brewster, 176 S.W.2d 311; rehearing denied Jan. 12, 1944.
Herein all the trust agreements were signed by the decedent and his wife. In the trust agreement for the benefit of Ann and Betty Showers, decedent and his wife each signed as grantor. The agreements creating the trusts designated as the Nancy Showers Trust Nos. 1 and 1-A were, according to statements therein, signed by the decedent as grantor and "pro forma" by his wife. The agreements creating the trusts designated as the Nancy Showers Trust Nos. 2 and 2-A were, according to statements therein, signed by decedent's wife as grantor and "pro forma" by the decedent. It was stipulated that under the laws of Texas all of the property transferred to the five trusts was community property of decedent and his wife. Under the laws of Texas, all of such transfers could have been made by the husband alone. The signature of his wife merely evidences her knowledge and consent to the transfers of her share in the community property. She could not, therefore, claim that the gifts were made in fraud of her community rights, and, in so far as disclosed by the record, no such claim has been made by her. The form of the instrument of transfer or trust is not determinative. In substance and effect, all the transfers, whether "pro forma" or otherwise, were made by the decedent, in whom rested the exclusive power of control and disposition of the community property.
Section 811 (d) (5) expressly provides that, for the purposes of subsections (d) and (c), "a transfer of property held as community property by the decedent and surviving spouse * * * shall be considered to have been made by the decedent," with certain exceptions not here applicable. The transfers herein were transfers of property held as community property by the decedent and surviving spouse and under the statute "shall be considered to have been made by the decedent." Thus, section 811 (d) (5) reaches not only property of which the decedent has made a transfer, as contended by petitioners, but any "transfer of property held as community property by the decedent and surviving spouse," whether made by the husband or wife or both. Section 402 was enacted to eliminate special estate tax privileges enjoyed by virtue of the community property system. Senate Committee Report No. 1631, 77th Cong., 2d sess., 1942-2, C. B. 673-674; House Committee Report No. 2333, 77th Cong., 2d sess., 1942-2, C. B. 401, 402, 489; Fernandez v. Wiener, 326 U.S. 340. It must be construed so as to effectuate the purpose of Congress.
Since the enjoyment of the community property transferred was subject at the date of the death of decedent to his power at any time to terminate the trusts, the value thereof is includible in his gross estate under section 811 (d) (1). The fact that such right was exercisable by him as trustee is immaterial under the statute. Commissioner v. Holmes' Estate, supra.
Is the value, at time of decedent's death, of the trust properties acquired with income of the trust includible in decedent's gross estate?
The Supreme Court, in Helvering v. Hallock, 309 U.S. 106, in which gifts in trust under section 302 (c) of the Revenue Act of 1926 were involved, stated that "The taxable event is a transfer inter vivos. But the measure of the tax is the value of the transferred property at the time when death brings it into enjoyment." A valuation which included accumulations of income constituting a part of the trust corpus on the date of death was employed by the Commissioner in Estate of Cyrus C. Yawkey, 12 T.C. 1164. As to such valuation the Tax Court decided in the Commissioner's favor "on authority of Estate of Daniel Guggenheim, 40 B. T. A. 181; modified and affirmed (C.C.A., 2d Cir.), 117 F.2d 469; certiorari denied, 314 U.S. 621; cf. Commissioner v. Estate of Hager (C. A., 3d Cir.) 173 F.2d 613; see also Estate of Spiegel v. Commissioner, supra [ 335 U.S. 701], where the accumulated trust income was likewise included in the estate, and that inclusion was approved." The Tax Court therein stated as follows:
* * * If decedent's retention and possession at his death of rights to designate the enjoyment of the income from the property were, as we have held, the statutory ground for inclusion, those rights extended as effectively to the income from the accumulated income as they did to the original principal. * * *
In Edgar A. Igleheart, Executor, 28 B. T. A. 888, it was held that, where the value of transfers made by a decedent during his lifetime is to be included in his gross estate for the purposes of the Federal estate tax, it is not unconstitutional to include in the gross estate the value of such property as at the date of the decedent's death, rather than as at the date of the transfers. The Circuit Court of Appeals, Fifth Circuit, affirmed the decision of the Board ( 77 F.2d 704), stating as follows:
* * * The thing taxed is the transmission of property from the dead to the living. For the purposes of the tax, property transferred by the decedent in contemplation of death is in the same category as it would have been if the transfer had not been made and the transferred property had continued to be owned by the decedent up to the time of his death. As to the property so transferred, as well as to property owned by the decedent at the time of his death, the measure of the tax is the value of that property at the time of the decedent's death. * * *
See also Estate of Frank A. Vanderlip, 3 T.C. 358, 362; affd., 155 F.2d 152; certiorari denied, 327 U.S. 728; and Liebmann v. Hassett, 148 F.2d 247.
Burns v. Commissioner, 177 F.2d 739, affirming 9 T.C. 979, and 11 T.C. 576, relied upon by petitioners, is distinguishable and not controlling herein. In that case, involving a gift in trust falling under section 811 (c) of the Internal Revenue Code, it was held that only the value of the Coca-Cola stock which the decedent transferred in trust during his life was includible in the gross estate, rather than the value of the entire trust corpus, as the Commissioner had determined. The decedent had made a complete inter vivos transfer of the stock to the trust and retained no interest in the corpus or income or any power to alter, amend, revoke, or terminate. The Tax Court in that case held that "where transfer of property has been completed during life and the death of the grantor does not operate upon the completion of the transfer, the estate tax is measured by the value of the property which the decedent transferred to a trust, only, and the tax is not measured by other property in the trust when death occurs." The Tax Court further stated as follows:
The conclusion above reached is not in conflict with the holding in Estate of Daniel Guggenheim, 40 B. T. A. 181, 182, 183 (modified and affirmed, 117 F.2d 499; certiorari denied, 314 U.S. 621). In the Guggenheim case the entire trust corpus was included in the decedent's gross estate because of the reserved powers retained up to the time of his death, a different situation than we have here, where the decedent retained no interest in or control over the property which he transferred in trust.
Humphrey's Estate v. Commissioner, 162 F.2d 1; certiorari denied, 332 U.S. 817, also relied upon by petitioners, is also distinguishable and not controlling. In that case the decedent within two years prior to his death made a cash gift of $40,000 to his two sons, which sum they shortly afterwards used in a speculative venture, losing half of it. It was contended that $20,000, rather than $40,000 as determined by the Commissioner, should be included in the decedent's gross estate. The cash gift of $40,000, held to have been made in contemplation of death under section 811 (c) was, as in the Burns case, a completed inter vivos gift when made, with no strings held by the decedent attached to it.
In Commissioner v. Holmes' Estate, supra, the grantor reserved to himself during his lifetime the power to terminate any and all of the three several irrevocable trusts established by him on January 20, 1935, and to distribute the principal, with accumulated income, to the beneficiaries then entitled to receive it. He retained no power to revest in himself or his estate any portion of the corpus or income. The Supreme Court stated as follows:
It seems obvious that one who has the power to terminate contingencies upon which the right of enjoyment is staked, so as to make certain that a beneficiary will have it who may never come into it if the power is not exercised, has power which affects not only the time of enjoyment but also the person or persons who may enjoy the donation. More therefore is involved than mere acceleration of the time of enjoyment. The very right of enjoyment is affected, the difference dependent upon the grantor's power being between present substantial benefit and the mere prospect or possibility, even the probability, that one may have it at some uncertain future time or perhaps not at all. A donor who keeps so strong a hold over the actual and immediate enjoyment of what he puts beyond his own power to retake has not divested himself of that degree of control which § 811 (d) (2) requires in order to avoid the tax.
Herein, therefore, the transfers in trust were not completed inter vivos gifts or transfers. The decedent had the power at any time to terminate the trusts and to deliver the trust estates to the beneficiaries then entitled thereto. His right to terminate extended not only to the property originally transferred to the trusts, but also to the properties acquired with trust income.
Where death effectuates the enjoyment by the donees of inter vivos transfers, the measure of the tax is the value of the trust estate at the time of death.
Furthermore, it is reasonable to assume that the wife knew of the provision in each of the trust agreements giving to her husband as trustee the right at any time to terminate the trust and deliver the trust estate to the beneficiary or beneficiaries then entitled thereto, regardless of age or condition in life of such beneficiary. By joining in the transfers the wife, by implication, granted to him such power over her interest in the community property. See Estate of Charles M. Sheaffer, 12 T.C. 1047. His power at any time to terminate the trusts extended not only to his own interest in the community property transferred, but also to the interest therein of the wife.
It is also argued by petitioners that the closing agreements executed in 1945 settled the question as to who made the specific gifts and that the Commissioner is now estopped to reopen and determine that question.
The closing agreements involved a controversy "as to whether certain gifts were made in 1932 to 1937, inclusive, or entirely in 1937." The gifts involved consisted of the setting aside out of community funds during 1932 through and including 1937 of cash in the aggregate amount of $33,594.45, which was used for the acquisition of a portion of certain mineral interests described in a trust instrument dated April 1, 1937, executed by taxpayer and spouse. It was agreed that " for the purpose of settlement of the Federal gift tax liability of the taxpayer that all gifts resulting from the above transactions were completed in 1937 and taxable for gift tax purposes during such year." (Emphasis supplied.) Presumably, as is usually done, the tax was computed under laws applicable to the year 1937. There is nothing in the agreements to indicate that in computing the gift tax liability of decedent or his wife the parties had in mind section 811 (d), relating to estate tax, as amended by section 402 (a), 1942 Act, or section 1000, relating to tax on gifts, as amended by section 453, 1942 Act. The agreements were merely a compromise of Federal gift tax liability and did not necessarily admit any particular fact or law. See Export Leaf Tobacco Co. v. Commissioner, 78 F.2d 163; also B. D. Phillips, 8 T.C. 1286; affd. per curiam, 178 F.2d 270.
It was such a situation as this undoubtedly, that Congress had in mind when it originally enacted what is now section 813 of the Internal Revenue Code, authorizing a credit of gift taxes against the estate tax where any property subject to the gift tax is required to be included in the donor's gross estate on his death. In Smith v. Shaughnessy, 318 U.S. 176, it is stated as follows:
* * * As we said there [ Estate of Sanford v. Commissioner, 308 U.S. 39], the gift and estate tax laws are closely related and the gift tax serves to supplement the estate tax. We said that the taxes are not "always mutually exclusive", and called attention to § 322 of the 1924 Act, * * * there involved (re-enacted with amendments in § 801 of the 1932 Act, * * *) which charts the course for granting credits on estate taxes by reason of previous payment of gift taxes on the same property. The scope of that provision we need not now determine. It is sufficient to note here that Congress plainly pointed out that "some" of the "total gifts subject to gift taxes * * * may be included for estate tax purposes and some not." House Report No. 708, 72d Cong., 1st Sess., p. 45. [C. B. 1939-1, art. 2, p. 489.] Under the statute the gift tax amounts in some instances to a security, a form of down-payment on the estate tax which secures the eventual payment of the latter; * * *
In our opinion the fact that gift taxes were compromised and paid on some or all the property herein involved does not preclude the inclusion of the value of the same property in decedent's gross estate.
Cramp Shipbuilding Co., 14 T.C. 33, is distinguishable. Therein the closing agreement, Form 906, provided that the taxpayer could take amortization deductions under section 124 of the Internal Revenue Code, as amended, provided all of the requirements of that section were satisfied. It was held that, since the taxpayer had complied in every respect with the provisions of section 124, and the deductions claimed by the taxpayer were correct in amount, the Commissioner erred in failing to allow them. The situation is very different here.
It is further contended by petitioners that retroactive application of section 811 (d) (5) will give rise to a tax which is arbitrary and capricious and which violates the due process clause of the Fifth Amendment to the Constitution of the United States.
A "tax is not necessarily and certainly arbitrary and therefore invalid because retroactively applied." Milliken v. United States, 285 U.S. 15. It was held in Chickering v. Commissioner, 118 F.2d 254; certiorari denied, 314 U.S. 636, that section 302 (d) of the Revenue Act of 1926 (corresponding to section 811 (d), I. R. C.) was not retroactive in any objectionable sense, the Court stating that, "While the trust was created in 1901, long before Congress had enacted an estate tax, the tax is an excise upon an event occurring subsequent to the enactment of the tax law." Herein, too, the tax is not imposed on the transfers made prior to the enactment of subsection (5), but upon an event occurring subsequent to the enactment of that section, i. e., the death of decedent, which was "the source of valuable assurance passing from the dead to the living." Porter v. Commissioner, 288 U.S. 436.
This question needs no extended discussion in view of Fernandez v. Wiener, supra, and United States v. Rompel, supra. In Fernandez v. Wiener, supra, it was claimed that section 811 (e) (2) of the Internal Revenue Code as amended by section 402 of the Revenue Act of 1942 and section 811 (g) (4) as amended by section 404 of the same act were invalid. In United States v. Rompel, supra, it was also claimed that section 811 (e) (2) as amended by section 402 of the Revenue Act of 1942 was invalid. In the latter case the Commissioner had levied an estate tax on the termination of a marital community by the death of the husband, a domiciled resident of Texas, the tax being measured by the value of the entire community property. After discussing the community property law of Texas, the Supreme Court stated that the death of either spouse of a Texas community effected sufficient alteration in the spouses' possession and enjoyment and reciprocal powers of control and disposition of the community property to warrant the imposition of an excise tax measured by the value of the entire community. For the reasons stated in the Wiener case, the Supreme Court concluded that the amendment of section 811 (e) (2) by section 402 of the Revenue Act of 1942 was not open to any of the constitutional objections raised. In the Wiener case the Supreme Court stated that the power of Congress to impose death taxes:
* * * extends to the creation, exercise, acquisition, or relinquishment of any power or legal privilege which is incident to the ownership of property, and when any of these is occasioned by death, it may as readily be the subject of the federal tax as the transfer of property at death. * * *
We find no basis for the contention that the tax is arbitrary and capricious because it taxes transfers at death and also the shifting at death of particular incidents of property. Congress is free to tax either or both, and here it has taxed both, as it may constitutionally do, in order to accomplish "the purposes and policy of taxation" to protect the revenue and avoid an unequal distribution of the tax burden. * * *
See also Beavers v. Commissioner, 165 F.2d 208; certiorari denied, 334 U.S. 811; United States v. Jacobs, 306 U.S. 363; Chickering v. Commissioner, supra; and Charles I. Francis, 8 T.C. 822.
It is our conclusion that section 811 (d) (5) does not violate the due process clause of the Fifth Amendment to the Constitution of the United States.
The inclusion of the value at date of death of the trust estates of $1,014,628.56 is approved.
In view of our conclusion it is not necessary for us to consider the further contention of respondent that the transfers are also includible in decedent's gross estate under section 811 (c) of the Internal Revenue Code.
Decision will be entered under Rule 50.