Docket No. 106867.
Paul N. Rowe, Esq., and Jos. J. Daniels, Esq., for the petitioner. John D. Kiley, Esq., and Edward C. Adams, Esq., for the respondent.
GIFT TAX— FIDUCIARY OF TRANSFEREE— NO EXCLUSION ON FUTURE INTEREST.— Donor and petitioner, the trustee, executed an irrevocable trust agreement in 1932, under which the right to change the beneficiaries, but not the right to revest any interest in himself, was reserved to the donor; the trust property consisted of insurance policies, with annual premiums to be paid by donor, and on his death, the proceeds to be divided into three shares, the income from one share to go to donor's son-in-law and on his death, to Indiana University, the other two shares to go to his daughters or their heirs. In 1936 donor renounced his reserved rights. Held, (1) the gift was completed in 1936, (2) trustee, as fiduciary of transferee, is liable for unpaid gift tax of donor but payment thereof is limited to the trust property, and (3) the gift to the son-in-law is of a future interest and no exclusion allowable. Paul N. Rowe, Esq., and Jos. J. Daniels, Esq., for the petitioner. John D. Kiley, Esq., and Edward C. Adams, Esq., for the respondent.
The respondent has determined that the petitioner is liable as transferee of Hugh McK. Landon for gift taxes for the calendar year 1936 in the amount of $4,472.39 plus interest, on gifts made by Landon during that year.
FINDINGS OF FACT.
Substantially all of the facts are stipulated and are found as stipulated. Those facts hereinafter appearing which are not from the stipulation of facts are facts found from the evidence introduced at the hearing.
Hugh McK. Landon is an American citizen and a resident of Indianapolis, Indiana. He filed a Federal gift tax return for the year 1936 with the collector of internal revenue at Indianapolis, Indiana. The petitioner is an Indiana corporation, with its principal place of business in Indianapolis. It conducts a general banking and trust business.
On May 23, 1932, Landon, as donor, and petitioner, as trustee, entered into and executed a written trust agreement whereby Landon irrevocably assigned, transferred, and set over unto the trustee certain policies of insurance theretofore issued on his life. Among other provisions, the trust agreement provided that the donor reserved to himself the right to change any of the beneficiaries named therein or the terms under which any beneficiary might take, except that the donor could not himself become a beneficiary.
The trust agreement was amended by the donor by amendments dated September 7, 1935, September 18, 1935, and July 18, 1936, all of which amendments were accepted by the petitioner as trustee. By the third amendment, dated July 18, 1936, the donor irrevocably canceled and surrendered his right to change any of the beneficiaries or any of the terms under which any beneficiary was to receive his share.
In the gift tax return for 1936, Landon recited the facts concerning the trust instrument of May 23, 1932, and outlined the terms of the amendment of July 18, 1936, described above, but reported no amount as taxable gifts during the year. On June 4, and June 7, 1937, Landon filed with the collector of internal revenue statements from the life insurance companies which had issued the above policies of life insurance showing the interpolated or gift tax values of the said policies as of July 18, 1936, the date on which he canceled and surrendered his right to change the beneficiaries or terms of the trust agreement. The values so shown for the four policies were $18,885.30, $18,034.66, $42,061.62, and $20,727.48.
Annual premiums on the said policies of insurance in the aggregate amount of $6,102, payable in December 1935, were paid in 1936 prior to July 18, 1936, the date of the third amendment, and the premiums in the amount of $6,102, payable in December 1936, were paid in 1937, all of which were in fact paid by Landon.
On June 4, 1937, the petitioner filed with the collector of internal revenue for the district of Indiana a ‘Donee's or Trustee's Information Return of Gifts ‘ for the year 1936, disclosing information similar to that appearing on the gift tax return previously filed by Landon. No gift tax was paid by either Landon or the petitioner in respect of 1936 gifts by Landon.
The trust instrument, by reason of the amendment dated September 7, 1935, provided for the disposition of the corpus of the trust estate and the income therefrom as follows:
2. Upon Donor's death to divide said fund into three equal shares and monthly thereafter to pay and apply to and for the use and benefit of Robert F. Scott, son-in-law of Donor, during his lifetime, the entire net income from one of said shares, and upon his death to perpetually retain the principal amount of said share, and thereafter at least quarterly to pay and apply the net income arising therefrom to and upon the order of the Board of Trustees of Indiana University for the promotion of the research or educational work of its medical department. Said fund shall be known and designated as the Elizabeth Landon Scott Memorial Fund.
3. To pay and apply monthly to and for the use and benefit of each of Donor's daughters, Alice L. Sawyer and Margaret L. Delaplane, respectively, during her lifetime, the entire net income from one of said shares and as much of the principal thereof as the Trustee in its judgment and discretion shall deem necessary for her care and support. * * *
4. Upon the death of either said Alice L. Sawyer or Margaret L. Delaplane, to pay and apply the net income and in its judgment and discretion as much of the principal amount then remaining of the share to which such deceased daughter would be entitled if living, as may be required for the education, care and support of the children now or hereafter born of such deceased daughter until the arrival of the youngest of such children at the age of twenty-five years, or until the death of the survivor of all of Donor's said daughters, whichever first shall occur, and thereupon to pay and distribute such share unto the descendants then surviving of such deceased daughter, per stirpes, and in default of any descendant surviving such deceased daughter, to hold and apply said share equally to and for the use and benefit of Donor's other surviving daughters, and/or the children of each other deceased daughter upon the same terms as herein provided with respect to the share of such daughter and/or descendants of a deceased daughter.
Alice L. Sawyer and Margaret L. Delaplane, daughters of the donor, and Robert F. Scott, Jr., his son-in-law, were each living on July 18, 1936, and are now living; and the board of directors of Indiana University is a corporation organized and operated exclusively for charitable, scientific, and educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and no part of the activities of which is the carrying on of propaganda or attempting otherwise to influence legislation, and was such corporation on July 18, 1936.
On January 18, 1941, the respondent mailed to the petitioner and on January 20, 1941, the petitioner received the notice of determination of deficiency against it as transferee for gift tax on 1936 gifts made by Landon. The respondent has at no time mailed a notice of such deficiency to Landon.
The petitioner's first contention is that no taxable gift was made by Landon in 1936 through cancellation and surrender of his right to change the beneficiaries of the trust or the terms of the trust agreement under which the beneficiaries were to receive their shares therein. It takes the position that, since the donor retained under the trust instrument as agreed upon and executed on May 23, 1932, no power to cause the beneficial title to any of the trust property to be revested in himself, the completed gift occurred on that date regardless of the fact that he did retain until the amendment of July 18, 1936, the right to change the beneficiaries named and the terms under which the interest of any beneficiary might be taken. It is argued by the petitioner that its position is in keeping with the provisions of article 3 of Regulations 79, as amended on February 26, 1936, and that the regulation as so amended is controlling. The question so raised has been considered and decided contrary to the contention of the petitioner in Aldus C. Higgins, 44 B.T.A. 1123; affirmed by the United States Circuit Court of Appeals for the First Circuit, 129 Fed.(2d) 237; certiorari denied, 317 U.S. 658, and that case is controlling here. See also Sanford's Estate v. Commissioner, 308 U.S. 39; Rasquin v. Humphreys, 308 U.S. 54.
The second contention of the petitioner is that even though Landon did make a taxable gift or gifts by reason of the above relinquishment of power on July 18, 1936, it is not liable as transferee or trustee for the Federal gift tax imposed on Landon by reason of such gift or gifts. The transferee provisions of the statute, section 526 of the Revenue Act of 1932, in and of itself was not designed and does not purport to create a new liability for tax on a transfer of property by gift, but to make applicable in collecting the liability of a transferee of property of the donor at law or in equity in respect of the tax the same methods of collection as are applicable in collecting the tax from the donor. See Phillips v. Commissioner, 283 U.S. 589. The petitioner admits that it is in fact a transferee of property of the donor but claims that it has no liability at law or in equity in respect of the tax on the gift of the property which it holds as trustee. It also concedes that the donee is a transferee under section 526, supra, and is therefore liable but denies under authority of Helvering v. Hutchings, 312 U.S. 393, and United States v. Pelzer, 312 U.S. 399, that it is the donee. Accordingly we have here a situation where the petitioner is in fact transferee of the property, the transfer of which by gift gave rise to the tax, and holds it for donees who as yet have not received the property itself but only the right to receive it at some indefinite future time. Considering the fact that such a large percentage of taxable gifts is effected by transfers of property, not to the donees directly, but to trustees who hold for them, we should have a strange situation indeed if it were true that Congress had extended the summary methods of collecting the liability in respect of the gift tax to a donee and not to the trustee who had received and holds the gift corpus for the donee.
SEC. 526. TRANSFERRED ASSETS.(a) METHOD OF COLLECTION.— The amounts of the following liabilities shall, except as hereinafter in this section provided, be assessed, collected, and paid in the same manner and subject to the same provisions and limitations as in the case of a deficiency in the tax imposed by this title (including the provisions in case of delinquency in payment after notice and demand, the provisions authorizing distraint and proceedings in court for collection, and the provisions prohibiting claims and suits for refunds):(1) TRANSFEREES.— The liability, at law or in equity, of a transferee of property of a donor, in respect of the tax (including interest, additional amounts, and additions to the tax provided by law) imposed by this title.(b) PERIOD OF LIMITATION.— The period of limitation for assessment of any such liability of a transferee or fiduciary shall be as follows:(1) Within one year after the expiration of the period of limitation for assessment against the donor.(f) DEFINITION OF ‘TRANSFEREE‘.— As used in this section, the term ‘transferee‘ includes donee, heir, legatee, devisee, and distributee.
Whether in the absence of the transferee provisions and other provisions of the statute, to which attention will be directed, it might be said that the petitioner by reason of its trusteeship is or is not liable at law or in equity in respect of the tax, we need not be concerned, for Congress did not leave the matter open to conjecture. In section 510 of the act it is provided that the tax in question ‘shall be a lien‘ upon the property transferred by gift ‘for a period of ten years from the time‘ the gift is made and further that ‘If the tax is not paid when due, the donee * * * shall be personally liable for such tax to the extent of the value‘ of the gift. In section 526(f) a donee is included in the term ‘transferee‘ and it matters not that the transfer of the property by gift did not render the donor insolvent. Evelyn N. Moore, 1 T.C. 14. In section 527 it is provided that ‘Upon notice to the Commissioner that any person is acting in a fiduciary capacity for a person subject to the liability specified in section 526, the fiduciary shall assume, on behalf of such person, the powers, rights, duties, and privileges of such person under such section (except that the liability shall be collected from the estate of such person), until notice is given that the fiduciary capacity has terminated,‘ and in section 1111 of the act the term fiduciary is defined to mean, ‘guardian, trustee, executor, administrator, receiver, conservator, or any person acting in any fiduciary capacity for any person.‘
SEC. 510. LIEN FOR TAX.The tax imposed by this title shall be a lien upon all gifts made during the calendar year, for ten years from the time the gifts are made. If the tax is not paid when due, the donee of any gift shall be personally liable for such tax to the extent of the value of such gift. * * *
SEC. 527. NOTICE OF FIDUCIARY RELATIONSHIP.(a) FIDUCIARY OF DONOR.— Upon notice to the Commissioner that any person is acting in a fiduciary capacity such fiduciary shall assume the powers, rights, duties, and privileges of the donor in respect of a tax imposed by this title (except as otherwise specifically provided and except that the tax shall be collected from the estate of the donor), until notice is given that the fiduciary capacity has terminated.(b) FIDUCIARY OF TRANSFEREE.— Upon notice to the Commissioner that any person is acting in a fiduciary capacity for a person subject to the liability specified in section 526, the fiduciary shall assume, on behalf of such person, the powers, rights, duties, and privileges of such person under such section (except that the liability shall be collected from the estate of such person), until notice is given that the fiduciary capacity has terminated.(c) MANNER OF NOTICE.— Notice under subsection (a) or (b) shall be given in accordance with regulations prescribed by the Commissioner with the approval of the Secretary.
The petitioner argues generally that section 527 has no applicability to the situation here, and more specifically that the rights, powers, duties, etc., arise only ‘Upon notice to the Commissioner‘ that a person is acting in a fiduciary capacity for a person subject to liability under section 526; that the Commissioner by regulation has provided that the notice shall be given in a particular form and, since it has given no notice of its trusteeship on the form specified, no duties or liability under section 527 has attached to it. We find no merit in the argument made. Certainly it can not be denied that petitioner is acting in a fiduciary capacity for the donees in respect of the property transferred by Landon, and the statute plainly states that the donees are liable under section 526 in respect of the gift tax herein, and to interpret the provision regarding notice, as the petitioner seeks to do, would permit a fiduciary to avoid or assume the duties and burdens to the Federal Government under its trusteeship according to its own volition. Furthermore, notice that the petitioner was acting as fiduciary for the donees was in fact given to the Commissioner in the gift tax return filed by the donor and in the information return filed by the petitioner. See and compare Germantown Trust Co. v. Commissioner, 309 U.S. 204, and Marie Minor Sanborn, 39 B.T.A. 721; affd., 101 Fed.(2d) 311. It is to be noted also that the provisions of section 527 amply protect a trustee who faithfully performs the duties assumed by it under its trusteeship from liability beyond the trust estate held, in that it provides that the liability of the transferee for which it acts shall be satisfied from the estate held for such transferee, and further provides that when the fiduciary capacity has terminated it may relieve itself of liability thereunder by giving notice of such termination. The petitioner, as trustee, is by law subject to the liability herein to the extent of the trust estate and the respondent's determination to that effect was not in error.
In his determination of the deficiency herein, the respondent has treated the petitioner, the trustee, as the donee and has allowed an exclusion of $5,000, under section 504(b) of the Revenue Act of 1932, In determining the net gifts. By amended answer, he now alleges that the beneficiaries of the trust and not the trustees are the donees, and that the interests held by the beneficiaries are future interests, in respect of which no exclusion of $5,000 is permitted. Sec. 504(b), supra. A plea is accordingly made for determination of an increased deficiency.
SEC. 504. NET GIFTS.(b) GIFTS LESS THAN $5,000.— In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year.
The petitioner makes no claim that the interests of Alice L. Sawyer and Margaret L. Delaplane are present interests, but does contend that the interest of Robert F. Scott is a present interest and that one exclusion of $5,000 must be allowed. The reasoning whereby the petitioner reaches the conclusion argued for is not clear. As near as we are able to determine, it is based upon the fact that the identity of all the beneficiaries in respect of the one-third share from which Robert F. Scott may eventually receive the income during his lifetime is and was on July 18, 1936, definite and known. As authority for the conclusion sought, the petitioner cites United States v. Pelzer, supra, and Helvering v. Hutchings, supra. We are unable to find any sound basis for allowing the contention made. Except for the fact that Indiana University, rather than persons indefinite and not known, is to succeed to the share from which Scott may eventually draw the income, we find no difference whatever between the interest of Scott and the interests of Alice L. Sawyer and Margaret L. Delaplane. As to each, his or her interest consists of the right to the income from one-third of the corpus of the trust as it exists at the date of the donor's death, and there is in none of them any prior right in or to the corpus or any of the income therefrom. Such interests are future interests, and in determining net gifts no exclusions in respect of such interests are permitted by the statute. The respondent is accordingly sustained on the issue raised by his amended answer.
The respondent concedes that the insurance premiums paid by the donor on the policies composing the corpus of the trust were paid in 1937 and not in the taxable year, and that in computing the taxable gifts herein the said premiums are to be excluded.
Reviewed by the Court.
Decision will be entered under Rule 50.