Docket No. 2352.
George Whitefield Betts, Jr., Esq., and Holt F. McKinney, Esq., for the petitioner. F. S. Gettle, Esq., for the respondent.
In 1940 petitioner, a resident of Switzerland, transferred securities located in the United States in trust for herself for life, and thereafter for her children, reserving a power of revocation, subject to the unanimous consent of the trustees, one of whom was a beneficiary of the remainder interest. The purpose of the trust was to prevent confiscation of her property by Germany in case of invasion of Switzerland. The trustees agreed to give their consent to revocation after the emergency had passed. Held, the power of revocation with the consent of the trustees, together with the agreement of the trustees to give their consent, renders the transfer incomplete for purposes of gift taxation; held, further, petitioner lacked the donative intent necessary to give rise to a taxable gift. George Whitefield Betts, Jr., Esq., and Holt F. McKinney, Esq., for the petitioner. F. S. Gettle, Esq., for the respondent.
This is a proceeding to redetermine a deficiency in gift tax for the year 1940, in the amount of $23,855.78. By amended petition, petitioner claims an overpayment of gift tax for the same year in the amount of $6,027.45. The principal issue is whether or not petitioner, by means of a trust executed on May 17, 1940, made a taxable gift to any part of the corpus of the trust. If this question is answered affirmatively, two subordinate questions are raised: (1) Whether or not there should be deducted from the amount of the gift the value of petitioner's reversionary interest in the trust, and (2) whether the value of certain shares of a Canadian corporation which are part of the corpus of the trust should be included therein for gift tax purposes.
FINDINGS OF FACT.
Petitioner, Marguerite F. Schwarzenbach, is and at all times material herein was a citizen and resident of Switzerland. Her residence is located at Restelbergstrasse 97, Zurich, Switzerland. She was born on August 13, 1889. Her gift tax return for 1940 was filed with the collector of internal revenue at Baltimore, Maryland.
In 1940 petitioner was possessed of a considerable estate located in the United States, consisting principally of stocks and bonds. Her brother, Otto Froelicher, a citizen and resident of the United States, managed her affairs in this country under a power of attorney granted him by petitioner on November 13, 1937.
When Germany invaded Holland and Belgium on May 10, 1940, Froelicher was fearful that the Germans would also invade Switzerland and would attempt to seize the assets of Swiss citizens or compel them to execute transfers of any property or money they might have. Because of this fear, Froelicher promptly conferred with petitioner's attorney in this country, George Whitefield Betts, Jr., of New York City, with a view to creating some method of protecting petitioner's property from seizure or enforced transfer by the Germans. Together they decided upon the creation of a trust by petitioner. On May 10, 1940, Froelicher wrote petitioner as follows:
I am writing this letter under the strain caused by the news of the invasion of Holland and Belgium and on top of it the radio also announced the invasion of Switzerland. I called up Dr. Nef at once and learned from him that the latter rumor was false, thank God. But nobody knows, whether it is only a postponement and the storm will strike before you receive this letter.
Regarding your own personal holdings in the U.S.A. we have decided to create a trust for you in view of the serious international situation. Betts is sending you the document to be signed and returned immediately. I hope we are not to (sic) late. It is a good solution and can be revoked after the war is over. Please attend to it at once. * * *
The idea of a trust was conceived by Betts and Froelicher. They drew up the trust indenture and then sent it to Switzerland for petitioner's signature. On May 17, 1940, petitioner executed the instrument in Switzerland and on the same day wrote to Betts as follows:
As you said I should attend to this trust at once, I write you from town having signed the document in front of 3 witnesses one of whom is Lilo. I shall send you the names of the witnesses typewritten as soon as I can.
Much love to you, Mary & Dick. I am much relieved about the trust as I don't want to let Adolf have it.
Thereafter, but before receipt of petitioner's letter in New York, Froelicher, anxious to know if the document had been received in Switzerland, telephoned petitioner in Switzerland. In the course of that conversation he explained again to her that the trust instrument was intended as a revocable trust designed to protect her property in this country against enforced transfer by the Germans.
Under the trust instrument, petitioner transferred to Froelicher, Betts, and her son, Jean Christophe Schwarzenbach, as trustees, securities having a fair market value, as of May 17, 1940, of $536,907.65. The instrument provided that the property was to be held and managed by the trustees for the following purposes:
(1) To pay to Marguerite Froelicher Schwarzenbach, the Donor, or to apply for her benefit, the said net income from the Trust Estate during her life.
(2) Upon the death of said Marguerite Froelicher Schwarzenbach, to pay, transfer and deliver the principal of the Trust Estate, with any accumulated income in their hands, to the children of the Donor, Anna Elizabeth Charlotte Schwarzenbach, Robert Maximilian Schwarzenbach, and Jean Christophe Schwarzenbach, in equal shares; in case any of the said children of the Donor shall not survive her but shall leave issue her surviving, to pay over, transfer and deliver the share which would have gone to such child to his or her issue, then surviving, in equal shares, per stirpes and not per capita; but if any of the said children of said Donor shall not survive her and shall not leave issue surviving her, to pay over, transfer and deliver the share which he or she would have received to the survivor or survivors of the children of said Donor in equal shares, with the proviso that if either one of them be not then living, but shall leave issue surviving at the time of the death of said donor, to pay over, transfer and deliver his or her share to his or her issue, in equal shares, per stirpes and not per capita; the intention hereof being that the issue of any one of said children surviving at the time of such distribution, should take the share that the parent would have taken if living; if at the time of the death of the Donor there be no children of the Donor, or issue of any deceased child of the Donor then surviving, to pay over, transfer, and deliver the principal of the Trust Estate, with any accumulated income in their hands, to such persons as would be entitled to receive the same under the Laws of the State of New York, had the Donor died intestate a resident of such State, possessed thereof, and in the proportions provided by said Laws.
The trust indenture further provided as follows:
EIGHTH: The Donor reserves the right with the unanimous consent in writing of the Trustees for the time being to withdraw from the trust hereby created any portion of the trust estate and/or to withdraw the whole of the Trust State and terminate and revoke this trust, and/or to amend in any respect this trust indenture. The Trustees are authorized to give such consent only if, in their judgment, under the circumstances they deem it for the best interest of the Donor. In the event of such termination or revocation, all of the Trust Estate so freed from the Trust shall be assigned, transferred, delivered and paid over by the Trustees to the donor, or as she may direct in writing.
At the time the trust agreement was executed it was understood by petitioner and the three trustees that the trust was an emergency device, designed to protect petitioner's property against seizure by the Germans; that the trustees would consent to withdrawals of principal by petitioner; and that the trustees would consent to revocation of the trust after the emergency had passed. The requirements that the trustees join unanimously in consenting to withdrawals or revocation was incorporated in the trust agreement in order to make it more difficult for the Germans to compel a transfer of the property. Jean Christophe Schwarzenbach was selected as the third trustee by Froelicher, and Betts, upon the recommendation of Froelicher.
In September and October 1940 petitioner, with the consent of the three trustees, withdrew amounts totaling $40,000 from the corpus of the trust. In May 1941 petitioner requested an additional withdrawal of $100,000 from the corpus of the trust; of the amount requested, the trustees withdrew $70,000 and forwarded it to petitioner. In connection with this withdrawal Froelicher wrote petitioner as follows on May 14, 1941:
I herewith confirm our conversation over the Telephone as well as our various cables regarding transferring $100000.— for your living expenses. * * * I sent you the money last Monday the 12th, Fr. 301075.25 the equivalent of $70000.— and hope you are satisfied. * * * It is hard to say whether or not to send more to you. I would like to limit it as much as possible, as I feel this country is still the safest of them all. And Switzerland is to (sic) close to Adolf for comfort. * * *
Petitioner replied as follows on July 28, 1941:
Just a line, (in addition to my letter of July 24.) to tell you I received on Saturday (this being Monday) your letter of May 14. Somehow the censor must have kept it back, as it was sent airmail, and should have arrived like all the other letters, which take from ten days to two weeks.
You are confirming our telephone conversation and the sending of the 7000.-dlrs. (sic)
I agree with you when you say that you would like to limit sending money over, as your country is still the safest of them all. For the present I am quite satisfied with the amount you sent me, and the children. There seems to be a tiny bit of talk here once in a while about a possible inflation. So it is certainly best to leave the rest of our money over there. * * *
On March 15, 1941, Froelicher, as agent for petitioner, filed a gift tax return for the year 1940 with the collector of internal revenue for the district of Maryland, including therein the amount of $88,832.84 representing a gift to Jean Christophe Schwarzenbach of one-third of the remainder interest in the corpus transferred to the trust on May 17, 1940. A gift tax was paid thereon in the amount of $6,027.45, within three years before the filing of the petition in this case.
On May 12, 1942, Betts wrote petitioner as follows:
Much to our surprise we received the other day a notice from the United States Internal Revenue Department that they claimed an additional gift tax of $23,855.78 on the transfer of your securities in trust to Otto, Crissy and myself as Trustees, in addition to the $6,027.45 which we had already paid as a tax on account of Crissy being interested in a share of the trust on your death. * * * At present we plan to petition to the Board of Tax Appeals. For this purpose it is necessary for you to make a power of attorney in triplicate to us to protest against the assessment and to appear at all hearings in connection with the tax.
On June 10, 1942, petitioner replied to Betts as follows:
I certainly don't know why there should & could possibly be a gift tax on this trust. Fi you explain why I made the trust I feel that this must show them that I don't give it to anyone, quite on the contrary, I tried to keep my money, putting it into a trust. Obviously now it was a mistake & I wish I had left it as it was; but at the same time g. invasion in Switzerl. seemed very possible here.
Included in the securities transferred to the trust were 200 shares of stock of the International Nickel Co. of Canada, a Canadian corporation. The fair market value of these shares as of May 17, 1940, was $4,600. This stock, together with all other securities constituting the principal of the trust, was held in a custody account by Dominick & Dominick, New York, New York.
The Commissioner determined a deficiency in gift tax for the year 1940 in the amount of $23,855.78. The reason for the determination is set forth in the following paragraph taken from the notice of deficiency.
Under the trust instrument dated May 17, 1940, you retained a life interest in the trust. The remainder value of the trust, after your life estate, is held to be a taxable gift in the year 1940. Section 1000 of the Internal Revenue Code.
Petitioner contests the entire deficiency, and by an amended petition claims an overpayment for the year 1940 in the amount of $6,027.45.
The problem presented here raises no novel question of law, but is distinguished only by reason of a somewhat unusual factual situation. Petitioner complied with all the forms necessary to create a valid trust for the benefit of herself for life and thereafter for her children. The trust instrument contained a power of revocation, subject to the unanimous approval of the three trustees, one of whom was a beneficiary under the trust. It is clearly shown, however, that the trustees, two of whom initiated the plan and drew up the instrument, realized that the purpose of the trust was merely to protect petitioner's property against confiscation by the Germans, and in substance agreed to consent to a revocation of the trust after the emergency. The requirement of unanimous consent by the trustees to revocation was inserted only as a further safeguard against the possibility of the use of force against petitioner to compel her to deliver her property over to Germany.
Petitioner contends that this was not a gift in trust because two of the essential factors necessary for a gift are lacking, namely, the intention to make a gift and the surrender of dominion and control over the subject matter of the gift.
It is settled that a transfer of property in trust where the power to revest title in the donor is reserved by the donor, either alone or in conjunction with another person not having an adverse interest in the disposition of such property, does not constitute a taxable gift, because the transfer is incomplete. Commissioner v. Prouty, 115 Fed.(2d) 331; Burnet v. Guggenheim, 288 U.S. 280; Sanford's Estate v. Commissioner, 308 U.S. 39; art. 3, Regulations 79, as amended by T.D. 5010, C.B. 1940-2, p. 293. Here the donor reserved a power of revocation, subject to the unanimous consent of the three trustees, one of whom, Jean Christophe Schwarzenbach, was a remainderman under the terms of the trust instrument. However, as has been said, the evidence shows beyond question that there was an agreement between petitioner and the three trustees that the latter would give their consent to revocation after the termination of the emergency which occasioned the creation of the trust. The situation was explained to Jean Christophe Schwarzenbach and he understood and agreed that he was to consent to withdrawals of principal by petitioner and to revocation after the danger had passed. Petitioner did not lose control of her ‘gift,‘ nor did the trustees have possession of it free from a duty to return it to her after the accomplishment of the limited purpose for which the trust was established. Johnson v. Commissioner, 87 Fed.(2d) 710, affirming 33 B.T.A. 1003. The effect of this agreement on the part of all three trustees is, in our opinion, to place the power of revocation solely in the discretion of the grantor. Although by the terms of the instrument the exercise of the power depended upon consent by the trustees, the contemporaneous agreement bound them to give that consent. In these circumstances, it is apparent that petitioner did not surrender such control and dominion over the property as to result in a taxable gift.
Furthermore, the evidence is most explicit in demonstrating that petitioner did not have that ‘clear and unmistakable intention * * * to absolutely and irrevocably divest * * * (herself) of the title, dominion and control of the subject matter of the gift, in praesenti * * * .‘ Adolph Weil, 31 B.T.A. 899; affd., 82 Fed.(2d) 561; certiorari denied, 299 U.S. 552. The purpose of the trust, the contemporaneous communications between the parties, and the subsequent withdrawals by petitioner in substantial amounts, all show that no gift was intended by petitioner. As stated in Richardson v. Smith, 102 Fed.(2d) 697:
* * * It is of course always possible that the parties to a formal transaction, like a deed or a written contract, may agree between themselves that it shall not have the effect upon their rights or obligations which i purports to have, or indeed any effect whatever; that it shall be a sham, fetch, a disguise. So in this case the transfer may in fact have been intended only to deceive the taxing authorities. It is not necessary that such a mutual understanding shall be explicit or verbal; it may be gathered from the conduct of the parties in a series of transactions, or in any other way. Johnson v. Commissioner, 2 Cir., 86 F.2d 710. All that need appear is that the donor did not intend to divest himself of control over the res, that the donee knew of the donor's intent and assented to it, and that the donor knew of the donee's assent. If all this is fairly inferable from the relations, the gift, however formal, is a sham; * * * .
In this case, the whole transaction was manifestly no more than a ‘sham, a fetch, a disguise‘ to deceive the German Government in case it should have come to a position where it could confiscate petitioner's property.
Respondent relies upon Herzog v. Commissioner, 116 Fed.(2d) 591. That case is readily distinguishable in that there the grantor retained no power of revocation and the benefit which he might have enjoyed under the trust rested completely within the discretion of the trustee. In this case the powers of withdrawal of principal and revocation, with the consent of the trustees, together with the understanding or agreement of the trustees to give that consent after the emergency had passed, present an entirely different situation.
We hold, therefore, that the determination of the Commissioner was erroneous; that no part of the transfer in trust constituted a taxable gift. and that petitioner made an overpayment of tax in the amount of $6,027.45 within three years prior to the filing of the petition in this case, under the provisions of section 1027 of the Internal Revenue Code.
Decision will be entered under Rule 50.