Fisher v. Commissioner , 45 B.T.A. 958 ( 1941 )

ELIZABETH H. FISHER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Fisher v. Commissioner

Docket No. 98637.

United States Board of Tax Appeals

45 B.T.A. 958; 1941 BTA LEXIS 1052;

December 9, 1941, Promulgated

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1. The value for gift tax purposes of single premium life insurance policies on the donor's life which the donor transferred as a gift in trust, held, the cost of the policies to the donor. Guggenheim v. Rasquin,312 U.S. 254">312 U.S. 254.

2. In 1937 petitioner conveyed to a trustee, irrevocably, certain bonds for the benefit of her grandchildren. The net income of the trust was to be distributed annually on December 20 to the beneficiaries (or to their parents or guardians until they were 21 years of age) until they attained the age of 25 years, when their proportional interests in the trust corpus were to be distributed to them free of trust. If any grandchild should die without issue his share of income and corpus was to go to the surviving grandchildren or their issue. Held, as to the corpus of the trust, the gifts were limited to commence in use, possession, or enjoyment at some future date and were therefore gifts of future interests with respect to which no exclusion is allowable under section 504(b) of the Revenue Act of 1932. United States v. Pelzer,312 U.S. 399">312 U.S. 399. Held, further, that as to the income of the trust, there were gifts of present interests in the trust fund to each of the living grandchildren and that the donor is entitled to an exclusion, not to exceed $5,000 with respect to each of such gifts.

F. T. Ritter, C.P.A., for the petitioner.

Samuel Taylor, Esq., for the respondent.

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SMITH

This is a proceeding for the redetermination of gift taxes for the years 1933, 1935, and 1937 as follows:

1933	$138.72
1935	64.56
1937	2,465.20

The issues presented for decision are:

(1) Whether, for gift tax purposes, two paid-up single premium life insurance policies on the life of the donor, purchased by the donor in the year 1933, should be valued at the cash surrender value of the policies at the time of the gift or at the cost of the policies to the donor.

(2) Is the donor entitled to an exclusion of not to exceed $5,000 for each individually named beneficiary of a trust when making a gift in trust during the year 1937 (total exclusions $29,662.49), or to but one exclusion of not to exceed $5,000?

By an amended answer the respondent seeks to increase the deficiency determined for 1937 upon the ground that the gift of the trust established in 1937 was of "future interests" and that he erred in allowing an exclusion of $5,000 in respect of the gift to the trust.

FINDINGS OF FACT.

Petitioner is a resident of Los Angeles, California. She filed gift tax returns for the years 1933, 1935, and 1937 with the collector at Los Angeles.

On January 10, 1933, petitioner purchased Policy No. 784844 of the Connecticut Mutual Life Insurance Co. of Hartford, Connecticut, paying therefor on said date a single premium of $38,565.50. The terms of the policy are that the insurance company, upon proof of the death of the insured, will pay $50,000 in accordance with the terms of an interest income agreement as of the date of the policy, or, if such agreement should terminate, to the insured's executors, administrators, or assigns (subject to the rights of the insured to change any beneficiary or mode of settlement). The cash or loan value of the policy on the date of the issuance, January 10, 1933, and on the date of the gift, January 20, 1933, was $36,763.50.

On January 11, 1933, the petitioner purchased Policy No. 1736388 of the Penn Mutual Life Insurance Co., paying therefor on said date a single premium of $19,442. By the terms of this policy the insurance company upon proof of the death of the insured agrees to pay $25,000 to the beneficiary, the right being reserved by the insured to change the beneficiary. The cash or loan value of the policy on January 11, 1933, the date of issuance, and on January 20, 1933, the date of the gift, was $17,371.75.

On January 20, 1933, the petitioner conveyed all of her rights in the policies to a trustee in trust for the benefit of her three adult children.

In her gift tax return for 1933 the petitioner included these policies at their cash or loan values as of the date of the gift. The respondent determined that they should be included at their costs, namely, the amounts of premiums paid, and issued his notice of deficiency accordingly.

The deficiency for 1935 arises solely from the respondent's determination of the net gifts for preceding years. In such determination he included the policies in question at the amounts paid for them by the petitioner rather than at their cash surrender values at the date of the gift.

The values of the policies for gift tax purposes are the amounts paid for them by the petitioner.

On September 9, 1937, the petitioner created a trust for the benefit of her six grandchildren and delivered to the trustee bonds of an agreed fair market value of $29,662.49. The trusts were declared irrevocable and the petitioner assigned to the trustee all of her right, title, and interest in and to the bonds.

The trust indenture provided in part as follows:

SECOND: The Trustee shall from the gross income received from said Trust Estate pay all taxes that may accrue against the Trust property or the income arising therefrom and all proper and necessary expenses of said Trust and the management thereof.

THIRD: The net income arising from said Trust Estate shall be disposed of by the Trustee as follows:

On or about the 20th day of December of each year the net income accumulated during said year up to the said time shall be distributed to the beneficiaries who have attained the age of twenty-one (21) years, and if under twenty-one years then to the herein designated parent of such beneficiary for his or her use and benefit, in proportion to the share of each therein as herein provided until he or she reaches the age of twenty-five (25) years, at which time his or her share in the corpus of said Trust fund, together with any accumulated and undistributed income therefrom shall be delivered to the beneficiary arriving at such age free and clear of any control by the Trustee as his or her own property.

FOURTH: The beneficiaries of this Trust are:

DANA B. FISHER and WAYNE H. FISHER, JR. sons of Wayne H. Fisher;

ROBERT F. OXNAM, PHILIP H. OXNAM and BETTY RUTH OXNAM, children of Ruth Fisher Oxnam; and

RICHARD A. YERGE, son of Rachel Fisher Fayram.

FIFTH: As to each beneficiary this Trust, subject to the provisions in paragraph "Sixth" thereof shall continue until he or she shall have attained the age of twenty-five (25) years, whereupon this Trust, as to such beneficiary so attaining said age, shall cease and determine and his share of the corpus of the Trust Estate, to-wit, one-sixth (1/6th) thereof together with one-sixth (1/6th) of any accumulated or undistributed income which may be in the hands of the Trustee at such time, shall go to and be delivered to such beneficiary so attaining the age of twenty-five (25) years.

SIXTH: Should either or any of said beneficiaries named in this Trust die prior to the termination of said Trust as to him or her, leaving issue, then the corpus and income that such deceased beneficiary would have received had such beneficiary lived, shall go to and vest in the issue of said deceased beneficiary by right of representation and as to whom said Trust shall be deemed terminated by his or her death; and should either or any of said beneficiaries die prior to the termination of this Trust, as to him or her, without issue, then the share or interest that such beneficiary would have received, if living, shall go to and vest in equal shares in the surviving beneficiaries and to the children of any deceased beneficiary, if any, by right of representation.

It was expressly provided in the trust agreement that none of the beneficiaries was to have any right to alienate any part of the income or corpus of the trust.

In her gift tax return for 1937 the petitioner, proceeding on the theory that six gifts were made through the trust agreement and that she was entitled to six exclusions not exceeding in the aggregate $29,662.49, did not include said sum of $29,662.49 in the total of the gifts made. The respondent determined that there was but one gift, the gift to the trust, and that the petitioner was entitled to but one exclusion of $5,000. By his amended answer the respondent claims that he erred in his allowance of the exclusion of $5,000 upon the ground that the gifts in trust were gifts of future interests, and accordingly asks for an increase in the deficiency arising from such alleged error.

OPINION.

SMITH: The first question presented by this proceeding is whether the two paid-up single premium life insurance policies on the life of the donor should be valued for gift tax purposes at the cost of the policies to the donor, as determined by the respondent, or at their cash surrender values at the date of the gift, as contended by the petitioner. This issue is decided in favor of the respondent upon authority of .

The second question is what exclusions, if any, the petitioner is entitled to in respect of the trust which she created for the benefit of her six grandchildren in 1937. In the determination of the deficiency for that year the respondent allowed an exclusion of $5,000, upon the theory that a single gift had been made to the trustee.

The respondent now contends that he erred in allowing an exclusion of $5,000 (upon authority of ); that the gifts to the grandchildren were gifts of "future interests" within the meaning of section 504(b) of the Revenue Act of 1932 as construed by the United States Supreme Court in , and ; and that petitioner is not entitled to any exclusions in respect of such gifts. Section 504(b) reads in part as follows:

* * * 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 * * * shall not * * * be included in the total amount of gifts made during such year.

In article 11 of Regulations 79 (1936 Edition) "future interests" are said to include:

* * * reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. * * *

The above provisions of the regulations were given approval by the Supreme Court in In that case there were gifts in trust to the donor's 8 living grandchildren and for any other grandchildren later to be born. The trustee was to accumulate the income for 10 years and thereafter pay it to the living grandchildren as they attained the age of 21 years in equal shares for life. There were provisions for gifts over of any deceased grandchild's share of distributable income. The trust was to continue for 21 years after the death of the last survivor of the named grandchildren, when the corpus and accumulated income were to be distributed to the surviving grandchildren (both named and unnamed), or the heirs of any deceased grandchild per stirpes. The Court held that the gifts made under the trust agreement were gifts of future interests within the meaning of section 504(b) above. Quoting from the committee reports recommending the enactment of section 504(b) and from the Commissioner's regulations referred to above, the Court in its opinion said:

We think that the regulations, so far as they are applicable to the present gifts, are within the competence of the Commissioner in interpreting § 504(b) and effect its purpose as declared by the reports of the Congressional committees, and that the gifts to the eight beneficiaries of the 1932 trust were gifts of future interests which are excluded from the benefits of that section. Here the beneficiaries had no right to the present enjoyment of the corpus or of the income and unless they survive the ten-year period they will never receive any part of either. The "use, possession or enjoyment" of each donee is thus postponed to the happening of a future uncertain event. The gift thus involved the difficulties of determining the "number of eventual donees and the value of their respective gifts" which it was the purpose of the statute to avoid.

The principal distinction between the instant case and the Pelzer case is that here the distribution of the trust income to the donees was to commence immediately within the year of the creation of the trust, rather than 10 years later, as in the Pelzer case. In other words, upon the creation of the trust each grandchild received an immediate right to a proportional share of the income from the $29,662.49 trust fund for a definite number of years, depending on his or her age at the date of the gift. We think that this right to receive such income was a gift of a present rather than a future interest.

In the Pelzer case the Court pointed out that the beneficiaries there had no right to the present enjoyment of the corpus or the income and would never receive any of the income or the corpus unless they survived the 10-year period. The beneficiaries here had the right to the present enjoyment of the income. This right was to continue until each beneficiary should attain the age of 25 years.

In , there was a gift in trust, the income to be paid to the beneficiary for 25 years or for life, whichever was the shorter period, when the corpus also was to be paid to the beneficiary if still living. We held, sustaining the Commissioner's determination, that the exclusions to which the donor was entitled on account of the gift were limited to the present value of the right of the beneficiary to receive the income of the trust for a period of 25 years. As to the corpus, we held that the gift was of a future interest.

Likewise, in , the gift of the income of a trust fund for life was held to be a gift of a present interest, in respect of which the donor was entitled to a $5,000 exclusion. See also .

Here, we think that there were gifts to the six grandchildren of a present interest in the income of the trust. The amount of each of such gifts was the present worth of the right to receive one-sixth of the income of the trust fund of $29,662.49 for the period during which it was to be paid to the donee.

We think that under the decision of the Supreme Court in the Pelzer case the gifts of the remainder interests, that is, the corpus of the trust, were gifts of future interests. The receipt of these gifts by the beneficiaries of the trust was contingent upon their attaining the age of 25 years. If any grandchild should die before that time, without issue, his or her share was to go to the survivors or their issue. There was no certainty whether, or to what extent, any of the beneficiaries would take upon final distribution of the corpus of the trust.

The respondent makes the argument that the gifts to the beneficiaries were gifts of "future interests" because the beneficiaries would receive no distribution until December 20 of each year. The argument of the respondent appears to be that since the income of the trust to be collected by the trustee was not to be paid over to the beneficiaries until December 20, the beneficiaries did not have the "use, possession, or enjoyment" of the income from the date of the creation of the trust. Under this interpretation of the law a gift to the beneficiary of a trust would necessarily be of a future interest unless the beneficiary had the right to demand from the trustee his share of the income of the trust as it was received, month by month, or day by day.

We do not think that this is a correct interpretation of the statute. We think that where the trust instrument provides that the income of the trust shall be distributed to the beneficiary annually or oftener the gift of the income is not a gift of a future interest.

Reviewed by the Board.

Decision will be entered under Rule 50.