Opinion
Docket No. 105502.
1943-06-25
DAISY B. PLUMMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John W. Windhorst, Esq., and Leland W. Scott, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent.
1. Transfer of property in trust with reservation of income to grantor for her life, together with right to withdraw $15,000 of principal each year, held, taxable gift as to the value of the remainder interest. Smith v. Shaughnessy, 318 U.S. 176, and Robinette v. Helvering, 318 U.S. 184, followed.
2. Respondent's computation of value of gift sustained. Henry F. du Pont, 2 T.C. 246, decided herewith. John W. Windhorst, Esq., and Leland W. Scott, Esq., for the petitioner. F. R. Shearer, Esq., for the respondent.
By this proceeding petitioner challenges respondent's determination of a deficiency in her gift tax for the year 1938 in the amount of $3,828.36. By amended petition she claims to have made an overpayment of $5,668.65 for the year 1938.
Two primary questions are involved: (1) Whether petitioner effected a taxable gift in the transfer of certain property to trustees in 1938, and (2) whether if a gift was effected respondent erred in computing its value by the use of the tables in his regulations based upon the Actuaries' or Combined Experience Table of Mortality.
FINDINGS OF FACT.
Petitioner is an individual residing in Olmsted County, Minnesota. She duly filed her gift tax return for the year 1938 with the collector of internal revenue at St. Paul, Minnesota.
Petitioner was born April 7, 1878, and on December 7, 1938, when she was 60 years and 8 months old, she transferred securities of the total value of $419,225 to G. Slade Schuster, John M. Berkman, and the First National Bank & Trust Co. of Minneapolis, under a trust agreement designated as the ‘Plummer Family Trust.‘ The agreement provided inter alia that (1) petitioner should receive the net income of the trust for life; (2) upon petitioner's death her son and daughter should receive one-half of the net income for their respective lives; (3) upon the death of petitioner's son or her own death, should she survive him, one-half of the net income should be paid to his widow during her lifetime; (4) after the death of the survivor of petitioner, her son, and his widow, one-half of the income was to be paid to or for the account of the son's children for a limited time; (4) after the death of the survivor of petitioner and her daughter that one-half of the net income was to be paid to or for the account of the daughter's children for a limited time; (6) after the death of the survivor of petitioner, her son, his wife, and petitioner's daughter, the net income was to be paid to the children of the son and daughter per capita and not per stirpes, and on their respectively becoming 35 years of age, they were to be paid one-half of their proportionate shares of the trust principal and the remainder upon attaining the respective ages of 45. Paragraph Fifth (a) and (b) of the trust provides:
(a) Notwithstanding any other provisions herein contained to the contrary, the Donor shall have the right in her absolute discretion to request of and receive from the Trustees installments of principal from time to time not in excess, however, of $15,000.00 in any one calendar year, beginning with the calendar year 1939, and such right of withdrawal shall not be cumulative. Requests for such withdrawals shall be in writing and if any withdrawals are requested during a period of sixty (60) consecutive days which aggregate more than $3000.00, the Trustees may withhold payment of the amount so requested for a period of sixty (60) days from the date the request is received and may then require such withdrawal request to be reaffirmed in writing.
(b) The Trustees may in the exercise of their discretion make withdrawals of principal from time to time for the maintenance, comfort and general welfare of the Donor's son or daughter or Evelyn Plummer, the wife of the Donor's son, and for the education of the grandchildren of the Donor or for any emergency such as accidental injury or protracted illness of any of such parties. The determination of the Trustees as to the propriety of such withdrawals of principal and as to the amount thereof in each case shall be final and conclusive, but they may require the approval of the Donor during her lifetime.
The transfer was stated to be otherwise irrevocable.
Petitioner was examined at the Mayo Clinic, Rochester, Minnesota, on March 30, 1939, and was found to be in normal good health of a woman aged 61.
In the gift tax return which petitioner filed, the value of the gift was reported as $125,415.74. This was increased in respondent's notice of deficiency to $158,015.73, it being stated:
It is found and determined that the present worth of the right retained by a person, aged 61, to withdraw $15,000.00 a year from a fund of $419,225.00 and to receive the income from the reduced fund each year he survives is $261,209.27. Accordingly, the value of the gift affected (sic) by placing the $419,225.00 in the trust created December 7, 1938, is $158,015.73.
The value as of December 7, 1938, of the remainder interest after the life of petitioner, taking into consideration the annual withdrawals, computed by reference to the Actuaries' or Combined Experience Mortality Table, with interest at 4 percent, is $158,015.73. These tables were computed by actuaries of 17 English and Scottish life insurance companies based on experience terminating in 1837. They are presently of little current use to actuaries of insurance companies except for the valuation of policies originating earlier than 1906.
Such value computed by reference to the 1930-1939 United States Life Tables is $125,974.71. These tables were not in existence in December 1938. They, as well as the earlier United States Life Tables are broken down to reflect life expectancy for white females. Such tables are based on general population studies and do not reflect any element peculiar to annuities.
Such value computed by reference to the American Experience Mortality Tables is $152,163.82. By statute in several of the states these tables are prescribed for use in connection with the values of insurance policies.
Such value computed by reference to American Annuitants' Female Ultimate Table published in 1925 is $116,587.95. The American Annuitants' Table were developed by and based upon the experience of a great number of life insurance companies in the United States with respect to immediate annuities on male and female lives. The tables were published in 1920 and covered experience from about 1900 to 1917. The table with reference to female lives was based upon experience with respect to 8,000 white women who purchased annuity contracts. These tables were used by many life insurance companies in writing annuity policies.
Annuity buyers as a group have certain characteristics derived from self-selection and financial security which gave them an expectation of life somewhat greater than the other general groups.
From an actuarial standpoint, conservative annuity writing depends on tables of relatively low mortality, while conservative insurance writing depends on tables of relatively high mortality. The Actuaries' or Combined Experience Table was recognized in 1938 by some states for the purpose of valuation for reserve purposes for life insurance but not for annuities.
No controversy exists between the parties as to the value of the securities transferred on December 7, 1938, which was $419,225, as to the proper interest rate to be assumed, which is 4 percent, or as to the propriety of the assumption that the full permitted amount of principal of $15,000 would be withdrawn each year during petitioner's life.
The present worth of a remainder interest in a fund of $419,225, after a life estate in a person aged 61 who has the right to withdraw from the fund $15,000 a year and to receive the income from the reduced fund each year such person survives, is $158,015.73, which is the value of the gift.
OPINION.
OPPER, Judge:
In several respects the present proceeding bears striking resemblances to Smith v. Shaughnessy, 318 U.S. 176. Petitioner here reserved the income of the donated property for life and the right to diminish the principal to the extent of $15,000 a year while she lived. Respondent's concession here that the value of the life estate should be excluded from the taxable gift is comparable to one admission on the part of the petitioner in the Smith case that the life estate was subject to gift tax. It is also conceded here by respondent, as it was in the Smith case, that the value of petitioner's right to receive back the gift upon the occurrence of the necessary contingencies is susceptible of actuarial computation, and that it, as well, is to be excluded from the taxable portion of the gift. There remains to be considered here, as in the Smith case, the question whether what is left after making allowance for the conceded items, that is, the interest passing from the grantor to the remaindermen, is a gift subject to tax.
On this point it seems to us the principle of Smith v. Shaughnessy is controlling. Cf. Estate of Lester Field, 2 T.C. 21. At the time the gift was created the possibility that the donor could regain any part of the property constituting the corpus of the gift depended upon the contingency of how long she might live. It is true that here that period can be measured without reference to the life of any other person, whereas in Smith v. Shaughnessy the question depended upon whether the donor should outlive the life tenant. It is difficult, however, to envisage a different result in the Smith case if the reversionary interest of the grantor had depended only upon his survival for a specified number of years. If anything, the measurable uncertainty is less, since we need deal with only one life. It would have been equally true in that situation, and is as true here, that ‘the grantor has neither the form nor substance of control and never will have unless he outlives‘ the stipulated period.
It is also true that in the Smith case the donor's reversion was unitary and became complete upon his survival of the life tenant, whereas here the donor's power of revocation is in effect piecemeal, and may be realized in installments as time passes and she survives. But it is recognized by both parties that if petitioner lives for 26 years these periodic withdrawals would enable her to recapture the property in full. While this may affect the computation of the value of her retained interest, we are unable to see that it constitutes a distinction in principle. This is virtually conceded by petitioner who says in her brief: ‘It seems apparent that the power to revoke the trust in its entirety at the end of a specified number of years is no different than the power to revoke the trust through withdrawals of corpus in annual installments.‘ Nor does the donor's retention of a life estate suffice to prevent the application of the tax, even though the estate tax may also attach. Robinette v. Helvering, 318 U.S. 184. We think it follows that the value of the remainder interest in the trust which petitioner created must be held to have constituted a taxable gift on the authority of the Smith and Robinette cases. This conclusion can not be reconciled with Emily Trevor, 40 B.T.A. 1241, which we must regard as overruled by those cases, and which will no longer be followed.
The computation of the value of the gift to the extent that it remains in issue is controlled by Henry F. du Pont, 2 T.C. 246, decided herewith.
Reviewed by the Court.
Decision will be entered for respondent.