Opinion
Docket No. 1997.
1944-10-12
ADELE F. GOODMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edgar B. Bronson, Esq., for the petitioner. Henry C. Clark, Esq., for the respondent.
On December 19, 1930, the petitioner created two trusts, transferring to the trustee to create trust estate A securities the income from which was to be used to pay premiums on five life insurance policies of $100,000 each on the life of her husband constituting trust estate B, the excess amount of income to be paid to herself. She reserved the right at any time during the lifetime of her husband to revoke the trusts and, after the death of her husband, the right to withdraw and repossess herself of not exceeding one-half of the assets constituting trust estate A. Her husband died on March 19, 1939, without any action being taken by the petitioner to revoke the trusts or to relinquish her right to revoke. Held, that the petitioner is liable to gift tax in 1939 upon the value of trust assets with respect to which the right of revocation was terminated by the death of her husband; held, further, that the value of the assets of trust estate B for gift tax purposes was the amount of the proceeds of the policies upon the death of the insured. Edgar B. Bronson, Esq., for the petitioner. Henry C. Clark, Esq., for the respondent.
This is a proceeding for the redetermination of a deficiency in gift tax for 1939 in the amount of $76,045.29. The questions in issue are (1) whether the petitioner is liable for gift tax in respect of the value of the assets of two trusts created on December 19, 1930, where the petitioner reserved the right of revocation up to the death of her husband, which occurred on March 19, 1939, without any action being taken by the petitioner in respect of the trusts; and, (2) if the petitioner is liable for gift tax in 1939 in respect of the trusts, whether the value of one of the trusts is the amount of the proceeds payable on five insurance policies on the life of the insured or a lesser amount.
The parties have stipulated that the petitioner is entitled to an unused specific exemption of $40,000 in the determination of net gifts, which specific exemption was not allowed by the respondent in the determination of the deficiency.
FINDINGS OF FACT.
The petitioner is a resident of New York City. She filed a gift tax return for 1939 with the collector of internal revenue for the third district of New York.
On December 19, 1930, petitioner, as settlor, with the Chase National Bank of the City of New York, as trustee, executed a trust instrument. The trust instrument was amended on January 15, 1931, and again on July 16, 1932, with respect to matters not here relevant. Pursuant to the provisions of the trust instrument, the petitioner transferred to the trustee securities constituting trust estate A, the income from which was to be applied to the payment of the premiums on five life insurance policies taken out by the petitioner on the life of her husband in 1930 for $100,000, each payable to the petitioner. The insurance policies were transferred to the trustee to form trust estate B. Any excess income of trust estate A was to be paid to the petitioner, and after the death of petitioner's husband all of the income of trust estate A was to be paid to petitioner for life.
After the death of petitioner's husband the proceeds of the life insurance policies, which would then comprise trust estate B, were to be set apart in specified proportions, respectively, in trust for the benefit of petitioner's three children, Susan, Maurice, Jr., and Walter, and her sister-in-law, Minnie Goodman. After petitioner's death trust estate A was to be divided in like proportions and added to the respective shares set apart for each of such beneficiaries. Upon the death of the sister-in-law her share was to be divided into equal parts and a part added to the share of each living child and a part paid to the descendants of each of the children who should then be dead; upon the death of any of the children the share of such child was to be paid to his or her descendants or, if none, then to the other children or their descendants; and if all the children should die without leaving descendants, the corpus was to be paid to the petitioner if then living, otherwise to her next of kin.
The trust indenture also provided:
SEVENTH: (a) The Settlor reserves the right at any time or from time to time during the lifetime of her husband * * * without notice to any person other than the Trustee, to revoke the trusts hereby created in whole or in part, * * * by filing written notice of such revocation, * * * with the Trustee; * * *
(b) The Settlor reserves the right after the death of her husband to withdraw and repossess herself of not exceeding fifty per cent. of the cash or securities constituting Trust Estate A, by filing from time to time written request therefor with the Trustee.
Maurice Goodman, the husband of petitioner, who was born on March 21, 1881, died on March 19, 1939.
On March 19, 1939, prior to the death of Maurice Goodman, the terminal reserve values interpolated to that date, together with the part of the last paid premiums apportioned to the end of the premium period of the insurance policies comprising trust estate B, aggregated $112,047.02.
On March 19, 1939, prior to the death of Maurice Goodman, the cash surrender values of the five insurance policies comprising trust estate B aggregated $108,975.06.
The amounts of the gross premiums, the dividends credited thereon, and the net premiums paid on the five policies of insurance comprising trust estate B were as follows:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Annual ¦Gross ¦ ¦Net ¦ ¦ ¦ ¦ ¦ ¦ ¦premiums ¦ +----------------------------+-----------+-------+-------+---------+----------¦ ¦Company ¦Policy No. ¦premium¦premium¦Dividends¦paid ¦ +----------------------------+-----------+-------+-------+---------+----------¦ ¦Mutual Life Ins. Co. of N.Y ¦4,388,071 ¦$4,646 ¦$41,814¦$7,320.00¦$34,494.00¦ +----------------------------+-----------+-------+-------+---------+----------¦ ¦Equitable Life Assurance ¦8,167,428 ¦4,646 ¦41,814 ¦6,000.00 ¦35,814.00 ¦ ¦Society ¦ ¦ ¦ ¦ ¦ ¦ +----------------------------+-----------+-------+-------+---------+----------¦ ¦Mutual Benefit Life Ins. Co ¦1,460,652 ¦4,356 ¦39,204 ¦5,416.00 ¦33,788.00 ¦ +----------------------------+-----------+-------+-------+---------+----------¦ ¦Mass. Mutual Life Ins. Co ¦971,327 ¦4,356 ¦39,204 ¦4,999.00 ¦34,205.00 ¦ +----------------------------+-----------+-------+-------+---------+----------¦ ¦Metropolitan Life Ins. Co ¦6,509,762-A¦3,599 ¦32,391 ¦3,317.80 ¦29,073.20 ¦ +----------------------------+-----------+-------+-------+---------+----------¦ ¦Total ¦ ¦ ¦194,427¦27,052.80¦167,374.20¦ +-----------------------------------------------------------------------------+
The face amounts payable upon presentation of proofs of the death of Maurice Goodman, under the insurance policies comprising trust estate B, aggregated $500,000, and the post mortem dividends which became payable thereon at the same time aggregated $3,314.15, making the total amount payable under the policies, upon the presentation of proofs of death, $503,314.15.
The gift tax return filed by the petitioner for 1939 reported that she had made no taxable gifts during the year and hence was not entitled to any exclusions therefrom.
In the determination of the deficiency the respondent held that, since the right of revocation as to one-half of the assets constituting trust estate A and as to the total assets constituting trust estate B was terminated by the death of the insured, the gift tax attaches to the value of such assets as of March 19, 1939, and that the value of trust estate B for the purposes of the gift tax was the proceeds of the policies, viz., $503,314.15.
OPINION.
SMITH, Judge:
We first consider the question whether the petitioner was liable for gift tax in any amount for 1939. The petitioner contends that she is not, for the reason that she took no action in 1939 relative to the trusts which she created on December 19, 1930.
The gift tax applicable to the year 1939 is imposed by the Revenue Act of 1932 as amended. Section 501 of that act provides as follows:
SEC. 501. IMPOSITION OF TAX.
(a) For the calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift.
(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; * * *
(c) The tax shall not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, but the relinquishment or termination of such power (other than by the donor's death) shall be considered to be a transfer by the donor by gift of the property subject to such power, and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of such income by gift.
In Burnet v. Guggenheim, 288 U.S. 280, it was held that under the Act of 1924, which contained no such provision as section 501(c) of the Revenue Act of 1932, a transfer in trust with a power of revocation reserved was incomplete as a gift, and became a taxable gift upon the relinquishment of such power. Following such decision, subsection (c) was repealed as unnecessary by section 511 of the Revenue Act of 1934.
The petitioner admits that upon the authority of Burnet v. Guggenheim a relinquishment in 1939 by the petitioner of her power to revoke the trust would have resulted in a taxable gift; in other words, the fact that the trust instrument was executed at a time when no gift tax law was in effect would have no materiality if the petitioner had relinquished her right to revoke in 1939. See also Commissioner v. Allen (C.C.A., 3d Cir.), 108 Fed.(2d) 961; certiorari denied, 309 U.S. 680, where a gift was made prior to the effective date of the Revenue Act of 1932, and the infant donor's right to disaffirm her gift upon attaining her majority was extinguished by her voluntary abstention from such disaffirmance when the time came, known in advance, for her to make the election. The petitioner submits, however, that the subsequent termination in 1939 of the petitioner's power of revocation without any act of volition on her part cannot be deemed a taxable gift by her under the Act of 1932.
Petitioner seeks to distinguish this proceeding from Commissioner v. Allen upon the ground that her power to revoke was terminated by an unpredictable event beyond her control, viz., the death of her husband.
In Sanford's Estate v. Commissioner, 308 U.S. 39, it was stated:
* * * The gift tax was supplementary to the estate tax. The two are in pari materia and must be construed together. (Burnet v. Guggenheim, supra, 288 U.S., page 286 * * * ). An important, if not the main purpose of he gift tax was to prevent or compensate for avoidance of death taxes by taxing the gifts of property inter vivos which, but for the gifts, would be subject in its original or converted form to the tax laid upon transfers at death.
It is entirely apparent that if the petitioner's contention upon this point is sustained the effectiveness of the gift tax as supplementing the estate tax would be largely emasculated; for a person could create a trust as the petitioner did, reserving the right to revoke, dependent upon some unpredictable event. While he had the right of revocation the gift was incomplete and no gift tax would attach. Burnet v. Guggenheim, supra. The gift would be completed upon the happening of the contingency. The gift tax would be avoided. So would the estate tax, provided the trust had not been created in contemplation of death.
No gift was made by the petitioner by the creation of the trust on December 19, 1930. She did, however, have a donative intent to make the gift, provided she did not revoke it, and such donative intent continued until the death of her husband. That occurred in 1939. The respondent correctly held that the gift was made in 1939.
The only other question in issue is the value of the trust assets constituting trust estate B. The respondent has determined that the value for gift tax purposes is the amount payable under the policies upon the death of the insured. It is stipulated that the amount payable on the policies, including $3,314.15 post mortem dividends, was $503,314.15.
The petitioner contends that the value of the gift is the value of the property which passes from the donor and not the value of the property receivable by the donees.
If the petitioner had relinquished her right to revoke during the lifetime of her husband, the value clearly would be less than the $503,314.15 payable under the policies. But she did not relinquish that right, and any argument based upon that theory is irrelevant. The value of the property that became absolute in the donees at the date of the death of Maurice Goodman was $503,314.15. If the petitioner had revoked the trusts prior to the death of her husband, she would have been entitled to receive (she was the beneficiary of the policies) the full amount of $503,314.15. The value of life insurance policies for estate tax purposes upon the death of a decedent is the proceeds of policies. Chase National Bank v. United States, 278 U.S. 327. Since the gift tax and the estate tax are in pari materia, we think that the same rule would apply in a case such as the present one. We therefore sustain the respondent's determination upon this issue.
Decision will be entered under Rule 50.