Schmidlapp
v.
Comm'r

This case is not covered by Casetext's citator
Board of Tax Appeals.Mar 6, 1941
43 B.T.A. 829 (B.T.A. 1941)

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Docket No. 98895.

03-06-1941

CARL J. SCHMIDLAPP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Watson Washburn, Esq., for the petitioner. Harold D. Thomas, Esq., for the respondent.


Watson Washburn, Esq., for the petitioner.

Harold D. Thomas, Esq., for the respondent.

The Commissioner determined a deficiency of $16,993.87 in the petitioner's gift taxes for the calendar year 1935. The first question for decision is whether or not the execution of an instrument by the petitioner in 1935, supplementing an original deed of trust executed by him in 1926, gave rise to a taxable gift in 1935. Another question, which arises only in case there was a gift in 1926, is whether the income from the trust property represents accumulated income or additional gifts at various dates. If a gift of any interest in the property was made under the 1935 supplemental instrument, then other alternative questions are (1) whether the petitioner is entitled to two $5,000 exclusions or only one such exclusion, (2) whether he is entitled to a specific exemption for 1935 in an amount in excess of $39,279.33, and (3) whether a deduction for trustees' commissions on the principal of the trust should be allowed in computing the amount of the taxable gift. The parties have stipulated that they will agree upon values of any estates material hereto before submitting computations under Rule 50.

FINDINGS OF FACT.

The petitioner, an individual, resides in New York, New York.

The petitioner was born on August 10, 1888. He has two unmarried daughters, Frances Downing Schmidlapp, born February 26, 1923, and Jean Cooper Schmidlapp, born December 24, 1924. He has never had any other children.

The petitioner executed on July 16, 1926, an instrument called "The Carl J. Schmidlapp Trust", naming himself as individual trustee and the Chase National Bank as corporate trustee. The instrument provided for the delivery by the petitioner to the corporate trustee of 1,000 shares of the common stock of the Allied Chemical & Dye Corporation to be held upon certain uses and trusts. The material parts of the instrument are as follows:

FIRST: The Trustees shall collect and receive the income of the Trust Fund and, during the life of the Grantor, shall divide the same into as many equal shares as there are from time to time children of the Grantor living, the children, however, of any deceased child, to be entitled collectively to the share to which their parent would have been entitled if living, and shall apply toward the support, maintenance, education and recreation of each of such children or grandchildren until they shall respectively reach the age of twenty-one, such part of such child's or grandchild's income as the Trustees shall seem proper, shall accumulate any balance of income remaining for the benefit of such child, or grandchild, and as each of such children or grandchildren attains the age of twenty-one shall pay over such accumulations to them, and shall thereafter pay over to each of such children or grandchildren in suitable installments the income collected for its benefit. On the death of the Grantor the Trustees shall divide the Trust Fund into as many equal shares as there are children and children of deceased children of the Grantor then surviving, the total of the shares, however, of the children of any deceased child, to be equal to the share to which their parent would have been entitled if living, and shall pay over the income of each of such shares to each of such children, or issue of deceased children, during the life of such child or issue, applying, however, for such children as are minors only so much of the income as to the Corporate Trustee shall seem proper for their support, maintenance, education and recreation, and accumulating any balance remaining for payment to such child on its attaining majority.

SECOND: The corpus of the Trust Fund shall be disposed of as follows: If at any time during the life of the Grantor no children or grandchildren of the Grantor shall be living, such corpus shall be paid over to the Grantor. After the death of the Grantor, he having left issue, the share of each of the children or children of deceased children of the Grantor entitled to receive income hereunder, shall on the death of such child or grandchild be paid in equal shares to his or her issue, or in default of issue to such person or persons as he or she may by last will and testament appoint, or in default of such appointment to such person or persons as by the laws of the State of New York then in force, had the beneficiaries died residents thereof and intestate, would have been entitled to the personal property of the beneficiaries, in shares provided by said laws.

THIRD: All income accruing to any beneficiaries from the above mentioned Trust Fund shall be for the support, maintenance, education and recreation of the various beneficiaries mentioned herein, except so far as hereinbefore otherwise expressly stated, and all payments of income so given shall be made only to such beneficiaries or to their legal guardians, on her or his own written order or receipt, drawn after such income becomes payable, (except that the Trustees may in their discretion make payments to either the father or the mother of infant beneficiaries, for their support, maintenance, education and recreation, provided no legal guardian has been appointed), and all provisions for the payment of income are made without power of anticipation or assignment on the part of the beneficiaries, and so that none of such income shall ever be liable to alienation or to be taken by any creditor or creditors of the beneficiaries, or to be subject to the control or claim of any husband or wife of any of the beneficiaries. * * * But in no event shall any payment of income under the provisions of this paragraph be made to the Grantor.

Additional property could be added to the trust. Compensation of the corporate trustee was fixed at 1 percent of the annual income of the trust during the life of the individual trustee and thereafter at 2 percent. The corporate trustee is also entitled to a commission of 1 percent of the value of principal whenever it is paid out. Another corporate trustee might be substituted for the Chase National Bank and, in that case, Chase was to receive a commission equal to one-half of 1 percent of the value of the property if the change was made within 10 years and 1 percent if the change was made thereafter.

The annual income of the petitioner in 1926 was about $400,000. His annual income since that time has never been less than $200,000. He has always provided for the support, maintenance, education, and recreation of his two daughters from his personal income. None of the income from the trust property has ever been used for that purpose and the petitioner never intended or expected it to be used for that purpose while he was able to provide for them out of his personal funds.

The income of the trust accumulated in the hands of the Chase National Bank until January 1928. The petitioner conferred with the bank at that time regarding the investment of the accumulated income and they decided, for some reason not disclosed by the record, to convert the income into additions to the trust corpus. The petitioner, in order to carry out this purpose, purchased with his own funds certain securities in January 1928, at a cost not exceeding the accumulated income of the trust. Several days later he received a check from the bank, drawn to his order, representing trust income in an amount equal to the cost of the securities. He deposited the check in his personal bank account and turned over the securities to the bank with instructions to add them to the corpus of the trust. The same procedure was followed in November 1928. Thereafter, until 1936, a different procedure was followed. Whenever a sufficient amount of trust income had accumulated, the petitioner was advised of the amount and instructed the bank to purchase certain securities and charge their cost to the accumulated income account of the trust. The bank then purchased the securities and, when the exact cost was determined, sent the petitioner a check for that amount. The petitioner then endorsed the check and returned it to the bank together with a memorandum instructing the bank to add the securities purchased to the trust corpus. It was always understood prior to the commencement of any such transaction that the petitioner would return the check to the bank properly endorsed.

The petitioner and the bank were advised by counsel sometime before the end of 1935 that the conversion of the trust income into trust principal was legally invalid. The additions to the trust corpus were thereafter restored to the accumulated income account of the trust. The income of the trust since December 31, 1935, has been invested in securities, without any payment of checks to the petitioner, and the securities have been held in the accumulated income account.

The petitioner was advised sometime prior to December 1, 1935, that the trust indenture executed on July 16, 1926, might be held partially invalid under the New York rule against the suspension of the absolute ownership of property for a period longer than the duration of two lives in being at the date of the execution of the instrument. The petitioner, in order to insure the validity of the trust, executed a supplemental indenture on December 31, 1935, the provisions of which are as follows:

WHEREAS, it was the intent of the Grantor and the Trustees hereunder that upon the death of the Grantor the share or shares of any beneficiary not in being at the date of the execution of said deed of trust should be paid over to such beneficiary, except that if any such beneficiary were under under sic twenty-one years of age, the Corporate Trustee should thereafter hold such share for such beneficiary during minority, applying such part of the income of such share as may be necessary for the support, maintenance, education and recreation of such minor, and paying over the balance of such income, together with the principal of such share, to such beneficiary upon his reaching the age of twenty-one, or to his executors or administrators in case of the death of such minor before reaching twenty-one, and

WHEREAS, it was the intent of the Grantor and the Trustees hereunder that so long as the Grantor is able to provide fully for the support, maintenance, education and recreation of any of his minor children, the share of the trust income payable to such minor children should be accumulated for the benefit of such children during minority.

Now, THEREFORE, the Grantor does hereby declare that the intent and effect of said indenture was and is as above stated in this supplement, and if because of any rule of law said intention cannot be effectuated, or in case the provisions of said original indenture applying subsequent to the death of the Grantor should on account of any rule of law be held invalid, so that the principal of said trust might revert to the Grantor's estate upon his death, the Grantor hereby assigns, transfers and sets over to the Trustees and their successors in trust all his right, title and interest, if any, in the income or the principal of said trust, during his life or at any time thereafter, to have and to hold the same unto the said Trustees, in trust, nevertheless, upon the uses and trusts and for the intents and purposes and with the powers and duties and subject to the limitations defined and set forth in said original trust indenture, as interpreted and explained in this supplement, to wit:

FIRST: The Trustees shall collect and receive the income of the trust fund and, during the life of the Grantor, shall divide the same into as many equal shares as there are from time to time children of the Grantor living, the children, however, of any deceased child to be entitled collectively to the share to which their parent would have been entitled if living, and shall apply toward the support, maintenance, education and recreation of each of such children or grandchildren, until they shall respectively reach the age of twenty-one, such part of such child's or grandchild's income as to the Trustees shall seem proper, but they shall have no power to apply any part of such income toward the support, maintenance, education and recreation of any child of the Grantor during minority so long as the Grantor is able to provide individually for such support, maintenance, education and recreation. They shall accumulate any balance of income remaining for the benefit of such child, or grandchild, and as each of such children or grandchildren attains the age of twenty-one, shall pay over such accumulations to them, and shall thereafter pay over to each of such children or grandchildren in suitable installments the income collected for its benefit. On the death of the Grantor the Trustees shall divide the trust fund into as many equal shares as there are children and children of deceased children of the Grantor then surviving, the total of the shares, however, of the children of any deceased child to be equal to the share to which their parent would have been entitled if living, and shall pay over the income of each of such shares to each of such children who were in being on July 16, 1926 during the life of such children, and shall pay over such share to any child or children or issue of deceased children born after July 16, 1926, applying, however, for such afterborn children or afterborn issue of deceased children as are minors at the date of my death, so much of the income thereof as to the Corporate Trustee shall seem proper for their support, maintenance, education and recreation, and accumulating any balance remaining for payment to such child or issue on their respectively attaining majority, together with the principal of their respective shares.

SECOND: The corpus of the trust fund shall be disposed of as follows: If at any time during the life of the Grantor no children or grandchildren of the Grantor shall be living, such corpus shall be paid over to the Grantor. After the death of the Grantor, he having left issue, the Trustees shall divide the trust fund into as many equal shares as there are children and children of deceased children of the Grantor living at the Grantor's death, the total of the shares, however, of the children of any deceased child to be equal to the share to which their parent would have been entitled if living, and upon the death of the Grantor's children him surviving who were also in being on July 16, 1926, shall pay over the share of such children in equal shares to their issue, or in default of issue, to such person or persons as they may by Last Will and Testament appoint, or in default of such appointment, to such person or persons as by the laws of the State of New York then in force, had the beneficiaries died residents thereof and intestate, would have been entitled to the personal property of the beneficiaries, in shares provided by said laws. The shares of any children or grandchildren of the Grantor living at the date of his death, who were born subsequent to July 16, 1926, shall be held for them by the Corporate Trustee until they reach respectively the age of twenty-one years, and paid over to them as they respectively reach the age of twenty-one years, or if they die before twenty-one, shall be paid over to their executors or administrators.

THIRD: The Grantor expressly ratifies and confirms and incorporates by reference in this supplement the provisions of Paragraphs Third, Fourth, Fifth, Sixth, Seventh and Eighth, inclusive, of said indenture of July 16, 1926. The Grantor hereby declares that at all times since July 16, 1926 he has out of his individual funds amply provided for the support, maintenance, education and recreation of his children, is presently doing so, and expects and intends to do so in the future. He will advise the Trustees promptly if at any time he is not able to continue so doing.

FOURTH: In case pursuant to the laws of New York State any of the provisions of the above supplement may only take effect by way of a partial revocation of said trust indenture dated July 16, 1926, then to the extent that such provisions affect any beneficial interest of the Grantor thereunder, the Grantor hereby revokes such provisions, if any, and directs the Trustees to hold the trust fund subject to the provisions of this supplement, and likewise consents to such revocation, pursuant to Section 23 of the Personal Property Law of New York State.

Commissions on the income of the trust fund were regularly paid to the corporate trustee each year. No commissions on the principal of the trust have been claimed by or paid to the corporate trustee.

The petitioner reported a gift to the trust in 1933 of cash in the amount of $6,593.17, from which he claimed one $5,000 exclusion and a specific exemption of $1,593.17. He reported a gift to the trust in 1934 of cash in the amount of $9,127.50, from which he claimed a specific exemption of an equal amount. The amounts reported as gifts in those returns corresponded to the income of the trust used in those years to purchase the securities added to the corpus of the trust, as described above. The petitioner filed an amended return for the year 1934 on March 15, 1938, upon which he claimed two $5,000 exclusions in lieu of any specific exemption. The petitioner did not report any gifts on his 1935 gift tax return, which he filed with the collector of internal revenue for the second district of New York. Copies of the two trust instruments were attached to that return, together with an explanation in part as follows:

The Donor believes that he made no gifts during the year 1935, but wishes to call to the attention of the Treasury Department the following circumstances:

On July 16, 1926, he established an irrevocable trust, of which both income and principal were payable to others. He was advised in 1935 that possibly the provisions in the trust deed to take effect after his death might be void under the New York rule against perpetuities. To correct this defect, the Donor, on December 31, 1935, executed a supplemental indenture to remove any such possible illegality. Copies of the original trust indenture and the supplemental indenture were filed with the Treasury Department in an information return of gifts by the trustees under the indenture, in March 1936.

Pursuant to the terms of the indenture and supplement, the sum of $8,874.94 was added to the trust fund during the calendar year 1935 out of accumulated income. It is Donor's belief that this sum likewise constituted merely an accumulation of income, and not a gift.

The Commissioner held in his notice of deficiency that the petitioner made total gifts during 1935 in the amount of $236,615.57 and allowed one $5,000 exclusion. The notice of deficiency contained the following explanation:

Since the trust created by you on July 16, 1926, was void because it violated section 11 of the New York Personal Property Law, the execution of the supplemental indenture of December 31, 1935, resulted in a gift within the meaning of the Gift Tax Act of 1932, of the following securities and cash:

* * * * * * *

Total _____________________________________________________ $236,615.57

OPINION.

MURDOCK:

This case presents a controversy revolving around the New York statutory rule against perpetuities. The Commissioner contends that the original instrument dated July 16, 1926, violated that rule and, therefore, was entirely invalid. Thus, he reasons that no valid gift was made in 1926 and the entire value of the property in 1935 is taxable as a gift made in that later year. The petitioner concedes that those provisions of the 1926 deed which were to the effect that the trust property should be held in trust during the lives of persons not in being at the time the instrument was executed, offended the rule. He contends, nevertheless, that the instrument created at least a valid trust for the life of the grantor; further, that the instrument was valid in so far as it related to the two daughters who were living on July 16, 1926; and, in any event, it was validly supplemented as of July 16, 1926, by the instrument dated December 31, 1935. He concludes that a valid completed gift of some kind was made in 1926 which could not be taxed as a gift in 1935.

The New York rule relating to limitations upon the vesting of absolute title to personal property appears in section 11 of the Personal Property Law, and is in part as follows:

The absolute ownership of personal property shall not be suspended by any limitation or condition, for a longer period than during the continuance and until the termination of not more than two lives in being at the date of the instrument containing such limitation or condition, or, if such instrument be a last will and testament, for not more than two lives in being at the death of the testator; * * *

The provisions of the 1926 deed which directed that a portion of the trust property should be held in trust during the life or lives of children or grandchildren who were not in being at the time of the execution of the trust violated the rule. However, it does not follow that the deed was invalid in its entirety. The courts of New York have frequently held one part of an instrument valid even though other portions were invalid because they would suspend the absolute ownership of property for too long a period. Tiers v. Tiers, 98 N. Y. 568; Kalish v. Kalish, 166 N. Y. 368; 59 N. E. 917; Hascall v. King, 162 N. Y. 134; 56 N. E. 515; Carrier v. Carrier, 226 N. Y. 114; 123 N. E. 135. The law of New York on the subject of partial validity of testamentary instruments which contain provisions offending the rule against perpetuities is summarized as follows in In re Durand's Will, 250 N. Y. 45; 164 N. E. 737:

The citation of authorities is of very little use in cases of this kind upon the fundamental principles of the law of wills. All the authorities cited are a mere repetition of these rules. The difference in the opinions is in their application to varying facts. What constitutes a suspension of the power of alienation is to be determined by the facts. The law is plain. Matter of Chittick's Will, 243 N. Y. 304, 153 N. E. 83. That we must consider in determining the application of section 11 of the Personal Property Law, not what the actual conditions now are, but what may happen, is well established. Matter of Mount's Will, 185 N. Y. 162, 77 N. E. 999. If the dominant purpose is the creation of a single trust to continue during more than two minorities, absolute ownership is illegally suspended and the trust in its entirety is void, even though in some contingencies it may end within the statutory term. Matter of Horner's Will, 237 N. Y. 489, 143 N. E. 655. In some instances it has been possible to disregard that portion of the will which rendered the trusts illegal, and preserve the rest. Matter of Trevor's Will, 239 N. Y. 6, 145 N. E. 66; Matter of Horner, supra. These cases express no new rule, but merely apply long-standing and well-recognized rules to new facts. The dominant, underlying principle in all these cases is to carry out as far as possible within the meaning of the statute the intention of the testator. If we can read into a will an intention to preserve any part of it, even with the illegal portions stricken out, the court will do so. In such a case we try to determine whether the maker of the will would have created the trust if all his express purposes could not be accomplished. This is not strictly law; it is a matter of good judgment, the judgment of men who according to our judicial system must in the last analysis determine the question. In declaring a testator's intention, however, the courts are limited to the words which the testator, himself, has used in his will.

Although the Commissioner recognizes that there is a rule permitting severance in some cases, he argues that the mere possibility that the instrument might call for a violation of the rule invalidates the whole and he cites a number of New York cases on this subject. He points out that the petitioner might have another child or one or more of his children might predecease him leaving issue and, in either event, the life estate provided for such child or issue of a deceased child in the 1926 trust instrument would suspend the absolute ownership of that portion of the trust property for a period longer than two lives in being at the date of the instrument. He further contends that the rule of severance applies only to testamentary dispositions, not to inter vivos transfers, and that it does not apply where the valid and invalid provisions relate to the same property. He fails to cite authorities, however, in support of these last two propositions. The case of Carrier v. Carrier, supra , cited by the petitioner, holds to the contrary on both points. Other authorities that the rule of severance applies even though the valid and invalid provisions relate to estates in the same property are In re Colegrove's Estate, 221 N. Y. 455, 117 N. E. 813; In re Trevor, 239 N. Y. 6, 145 N. E. 66; In re Lyons' Will, 271 N. Y. 204, 2 N. E. (2d) 628; In re Gorham's Will, 283 N. Y. 399, 28 N. E. (2d) 888. The courts of New York, however, have refused to apply this saving rule of severance where to do so would distort the intention of the grantor as indicated in the instrument.

Decisions indicating when a gift is complete for gift tax purposes must also be kept in mind. Transfers which are not complete until the death of the transferor removes the possibility that the property will revert to him are subject to estate tax, Helvering v. Hallock, 309 U. S. 106, and are not complete gifts for gift tax purposes in some year prior to his death. A completed gift for gift tax purposes means one not coupled with a possibility of reverter which may defeat it before it ever reaches the donee. Helvering v. Hallock, supra ; Lorraine Manville Gould Dresselhuys, 40 B. T. A. 30; Emily Trevor, 40 B. T. A. 1241; William T. Walker, 40 B. T. A. 762; Marrs McLean, 41 B. T. A. 1266; Margaret White Marshall, 43 B. T. A. 99. Cf. Klein v. United States, 283 U. S. 231; Sanford v. Commissioner, 308 U. S. 39; Hughes v. Commissioner, 104 Fed. (2d) 144; Hesslein v. Hoey, 91 Fed. (2d) 954; Van Vranken v. Helvering, 115 Fed. (2d) 709. One of the thoughts back of those decisions was that since section 510 makes the donee of a gift personally liable to the extent of the value received by him, he should not be taxed on a gift which he might never be able to receive and enjoy.

There are provisions of the 1926 deed which are valid and which may be conveniently and properly severed from those which were invalid or which are of doubtful validity. Those provisions which created a trust for the benefit of the children and their issue during the life of the grantor did not violate the New York rule against perpetuities, and it is reasonable to assume that the grantor would have desired to preserve that trust even though the remaining purposes of his deed could not be attained. The instrument provided for a rather distinct change immediately after the death of the petitioner. The trust property was to be divided at that time into as many portions as he had children or issue of deceased children then living. This probably meant separate trusts. Cf. United States Trust Co. of New York v. Commissioner, 296 U. S. 481; In re Colegrove's Estate, supra; Vanderpoel v. Loew, 112 N. Y. 167; 19 N. E. 481. Even if these latter provisions were wholly invalid, nevertheless, the courts of New York would probably hold that the trust which could not survive the grantor was valid. Carrier v. Carrier, supra . The trust to which we refer was to consist of the entire property and was to last for the life of the grantor or was to terminate sooner "if at any time during the life of the Grantor no children or grandchildren of the Grantor shall be living." There was no possibility of that trust being defeated by reverter. An actuary might conclude that the birth of additional children or of grandchildren would increase the duration and value of this estate, but the birth of such persons would not defeat it. Nor would the death of the decedent defeat it, since by its very terms it was to end not later than at his death. Thus, the petitioner, by the 1926 deed, made a valid completed gift of an estate in the property measured by the joint lives of himself and the survivor of an unbroken line of children and grandchildren. He could not again make a gift of that estate in 1935. The Commissioner erred in taxing the entire value of the transferred property as a gift in 1935.

The petitioner would have us conclude that completed valid gifts, in addition to or of greater value than the one which we have described in the preceding paragraph, were made under the 1926 deed. He argues, for example, that the 1935 instrument merely supplemented the 1926 deed and was effective retroactively as of July 16, 1926. He cites no authority which directly supports this view. The argument is unsound for present purposes. The 1935 instrument became effective, for gift tax purposes at least, in 1935 and not in 1926. The other contention of the petitioner is that the 1926 deed was entirely valid in so far as it relates to the living daughters and estates for them and their issue in case they survived the petitioner. He says that the courts of New York would not declare the deed invalid in any respect as long as suspension of absolute ownership was not actually dependent upon the life of any person not in being on July 16, 1926. He argues that it was improbable that any other children would be born to the petitioner or that there would be any issue of a deceased child living at the date of the death of the petitioner. He cites In re Mount's Will, 185 N. Y. 162; 77 N. E. 999, and Mount v. Mount, et al., 196 App. Div. 508; 188 N. Y. S. 170; affirmed without opinion, 234 N. Y. 568, to show that the courts of New York would wait to see what the circumstances will actually prove to be at the date of the death of the petitioner, and if the survivors at that time are only Frances and Jean, the deed would be held valid in its entirety. He does not go on to discuss what the situation would be if there were at that time another child of the grantor or issue of a deceased child, except to admit that the trusts for those persons would be held invalid. The Commissioner argues that the validity of the deed, and of any severable part of it, is determinable at its inception by assuming the most unfavorable possibilities. This difference between the parties presents an extremely difficult question and some equally difficult corollaries, all of which we believe may be avoided at this time as unnecessary to the decision of the case.

The 1926 deed provided that the property should revert to the petitioner during his lifetime upon the first occasion that he had neither children nor grandchildren living. Thus, there was a possibility that the entire property would revert to the petitioner during his lifetime, and for this reason we are unable to say that any estate greater than an estate for the life of the petitioner was the subject of a completed gift under the 1926 instrument. The estate which we have described above as a completed valid gift was in a sense a lesser estate, being dependent upon the joint lives of the petitioner and the last survivor of an unbroken line of children and grandchildren. The 1935 instrument also contained the provision that the property should revert to the grantor "if at any time during the life of the Grantor no child or children of the Grantor be living." Thus, there was the same possibility of reverter under the 1935 instrument that there was under the 1926 deed, and we are unable to say that the petitioner made a completed gift of any greater estate under the later instrument than he did under the earlier one.

Since we can not be sure to what extent the courts of New York would hold the 1926 deed valid, some discussion of the tax consequences of holdings other than the one we have adopted seems proper. If the contention of the petitioner that he made a greater gift in 1926 is sound, the result would be the same as the one which we have reached. A different result would be reached only in the event that some greater estate was given in 1935. We are unable to identify any such estate. The respondent contends that there was a gift in 1935 of life estates measured by the lives of the two daughters who were then living. Perhaps an actuary would attribute to an estate for the lives of the two daughters a value greater than the value he would attribute to the estate which we have held was the subject of a completed gift in 1926. But solution of the question before the Board is not advanced by an attempted comparison of those estates. The fact of the matter is that the petitioner, both in the 1926 deed and in the 1935 supplement, recognized the possibility that he might outlive his two daughters, and expressly provided that in that event the entire property should revert to him. Furthermore, it must be remembered that the two daughters were persons in being on July 16, 1926, and the petitioner is arguing that the trusts for their lives provided by the 1926 deed do not offend the rule against perpetuities and, therefore, those trusts were valid gifts in 1926. Also, if the petitioner made such a gift in either year, the next question would be whether he didn't make a completed gift of the remainder interests also. We do not see how the gift of the life estate could be complete and valid under either instrument any more than the gift of the remainder interest would be complete and valid. This brings us back to the answer which we have already given, namely, that, since there was a possibility of reverter in the petitioner during his life, there was no completed gift of any estate which would extend beyond his life, and, also, we have concluded that he did not make any completed gift in 1935 greater than he had theretofore made in 1926.

The income of the trust up to December 31, 1935, did not belong to the petitioner and he could not make any gift of that income. The third paragraph of the trust provided that in no event should any payment of income be made to him. That income had to be accumulated for Frances and Jean and was payable to them when they became twenty-one years of age. The parties finally realized that and set it up as accumulated income. It would not benefit the Commissioner to argue that this income could be used to discharge an obligation of the petitioner, that is, to maintain and support his two daughters. The same argument could be applied just as well under the 1935 trust instrument, because neither daughter had reached her majority in 1935.

Furthermore, any possible error in the decision of this case which would not exceed $60,000 in value of property would not change the result. The petitioner, in making gifts through these trusts in any calendar year, was entitled to two exclusions of $5,000 each. Wilton Rubinstein, 41 B. T. A. 220. It is not important whether or not he claimed the two $5,000 exclusions in any year. The act, in section 504 (b) of the Revenue Act of 1932, provides that "the first $5,000 of such gifts to such person shall not * * * be included in the total amount of gifts made during such year." Thus, it appears that any additions in 1933 and 1934 could not possibly have exceeded the two $5,000 exclusions and the petitioner comes to 1935 with his specific exemption of $50,000 allowed in section 505 (a) intact. Since he made no gifts in any year in excess of the exclusions, he never was required to make any election in regard to the $50,000 exemption. Cf. Lunsford Richardson, 39 B. T. A. 927. The question of principal commissions on the trust property does not require decision.

Decision will be entered under Rule 50.