Fleming v. Commissioner , 3 T.C. 974 ( 1944 )

William Fleming, Petitioner, v. Commissioner of Internal Revenue, Respondent

Fleming v. Commissioner

Docket No. 109838

United States Tax Court

3 T.C. 974; 1944 U.S. Tax Ct. LEXIS 107;

June 6, 1944, Promulgated

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Decision will be entered under Rule 50.

A husband and wife conveyed certain community property to the husband as trustee in trust for a named beneficiary. The trustee was vested with the same right to control, manage, sell, and dispose of the trust property as if he were the absolute owner thereof except that neither the title to nor beneficial ownership of the trust property could be reinvested in the grantors without the payment of full and adequate consideration therefor. Also, the trustee was empowered to make present gifts or to arrange for making gifts in the future to charitable, religious, or educational institutions, and to relatives of the grantors, or either of them, from the trust property. The trustee was vested with absolute discretion as to the amount and recipient of such gifts except that the total gifts to relatives could not exceed 25 percent of the total corpus of the trust and its accumulated revenues. Distributions of trust income were made to the named beneficiary. Held:

(1) The conveyances of the property in trust were not completed gifts as to the husband's one-half community interest therein and the distributions of trust income to the named beneficiary were to the extent of one-half thereof gifts by the grantor husband to be taken into account in determining his gift tax liability.

(2) On the facts, neither res judicata nor estoppel in pais applies to circumvent holding 1.

Harry C. Weeks, Esq., for the petitioner.

Frank B. Appleman, Esq., for the respondent.

Hill, Judge.

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HILL

This proceeding involves a determination of gift tax deficiencies for the years 1935 to 1939, inclusive, together with penalties for failure to file gift tax returns. As originally determined by respondent, the deficiencies aggregated $ 5,106.75 and the penalties $ 1,276.70. The determination was made on the theory that one-half of the distributions made in each year from a trust to petitioner's daughter, the beneficiary, constituted a taxable gift of petitioner. No other amounts were taken into account in the adjustments. It is now stipulated between the parties that petitioner made a $ 5,000 cash gift to his daughter in each of the years 1935 through 1938 and, should respondent be sustained in this appeal, that the deficiencies and penalties for those years should be increased to reflect such cash gifts. By amended answer respondent claims that the deficiency and penalty for 1938 should be further increased by including in the computation of petitioner's gifts for that year $ 21,215.17 alleged to have been the subject of a gift by petitioner to his wife.

The questions presented are as follows:

(1) Is petitioner liable for gift taxes on one-half of the amounts annually distributed to his daughter from a trust of which his daughter was the beneficiary and the petitioner and his wife were the grantors?

(2) Is petitioner liable for a penalty of 25 percent of each year's tax for failure to file gift tax returns?

(3) Are previous adjudications a bar to the determination here involved?

(4) Is respondent estopped from making the determination by reason of positions taken by him with respect to the taxation of income from the trust?

(5) Did the purchase of single premium life insurance and annuity contracts on the life of petitioner's wife constitute gifts of petitioner measured by one-half the premiums paid or one-half the value of the contracts?

No gift tax returns were filed by petitioner for the years in question. His place of business was within the jurisdiction of the collector for the second collection district of Texas.

All the facts pertaining to the original issues were stipulated by the parties and the stipulation is adopted herewith. We set forth only so much thereof as is necessary to an understanding of such issues. Facts relevant to the issue raised by the amended answer are found from oral and documentary evidence.

FINDINGS OF FACT.

During all times here material petitioner was the husband of Anna Maud Fleming, whom he had married in 1900 and who died in 1941. Petitioner and his wife resided in Texas continuously from 1912. They had one child, a daughter, Mary D. Fleming, born October 29, 1913. She married F. Howard Walsh on March 13, 1937.

On December 30, 1933, petitioner and his wife created a trust for the primary benefit of Mary, with petitioner the trustee. The original corpus of the trust consisted of $ 100,000 cash transferred to the trustee from the donors' community funds. The following year the donors contributed to the trust from their community property 1,200 shares of the capital stock of the F. H. E. Oil Co. No other contributions have been made to the trust. The trust was evidenced by an agreement which in nowise has been modified or amended. It provided that during the tenure of petitioner as trustee he "shall have the same right to control, manage, sell and dispose of the trust property, and every part thereof, as he would have if he were the sole and absolute owner thereof in fee simple, except" that neither the petitioner nor any successor trustee could reinvest petitioner or his wife with title to or beneficial ownership of any part of the trust property except upon the payment of full and adequate consideration; nor could they on any enterprises which they control deal with the trust except upon Mary's written consent.

Paragraph 2 (i) of the trust instrument empowers petitioner as trustee:

To make gifts presently, or to arrange for the making of gifts in the future, from the trust property or its revenues, to charitable, religious or educational institutions or enterprises, and to relatives of the grantors, or either of them, he having absolute discretion as to the amount and recipient of such gifts and the time for making them, save and except that the total gifts which he may make to individuals related to the grantors, or either of them, shall not exceed twenty-five (25%) percent of the total corpus of the estate and its accumulated revenues.

Distribution of trust income or corpus was discretionary with the trustee, with undisbursed income to be added to the trust fund. Should Mary predecease either of the donors the property then belonging to the trust was to revert to the donors or the survivor thereof. In the event that petitioner should die or become incapacitated to act as trustee, the instrument provided for successor trustees who were then to liquidate the trust corpus in acccordance with specific directions not material here.

Petitioner and his wife filed gift tax returns for the years 1933 and 1934 reporting, respectively, transfers of the $ 100,000 and the 1,200 shares of F. H. E. Oil Co. stock to the trust. In 1933 the returns disclosed no tax liability, due to the application of authorized exemptions and exclusions and no gift tax has been paid by petitioner and his wife for that year. Each donor reported and paid a gift tax liability of $ 1,828.10 for 1934. Thereafter respondent determined and assessed against each donor an additional gift tax for 1934 of $ 5,134.65, based upon an upward adjustment in the value of the F. H. E. Oil Co. stock. These additional assessments, together with $ 443.20 interest, were paid on April 15, 1937. In connection with the examination resulting in such additional taxes, the collector of internal revenue, on April 29, 1935, had been furnished with a copy of the trust agreement and respondent's agents had been given complete information respecting the property held by the trust and its method of operation.

Neither petitioner nor his wife filed gift tax returns for the years 1935 to 1939, inclusive. They have never reported as gifts the distributions made by petitioner as trustee to Mary, but petitioner did furnish all information requested by respondent with respect to the facts involved in this controversy. Substitutes for gift tax returns for petitioner have been prepared by respondent.

The trust, known and hereinafter referred to as Wm. Fleming, trustee, adopted as its accounting period the fiscal year ending August 31. It filed a fiduciary income tax return for each period ended on August 31 from 1934 through 1939. A loss was reported for the year ended August 31, 1934, and no distribution was made during this period. After investigation the respondent determined a tax liability of $ 363.42 for this year, which was thereafter assessed and paid without objection. Except for this first period, Wm. Fleming, trustee, annually took a deduction for the amounts distributed to Mary and paid a tax on the balance of the net income as reported. The returns for these years also were investigated and in each instance an additional tax was proposed, protested, and determined, after the customary conferences. The distribution to Mary, amount of net income reported, tax paid, net income before distribution to Mary as adjusted by respondent, and deficiency determined for each of the years ended August 31 through 1939 are as follows:

				Net income
	Distribution	Net income	Tax paid	before	Deficiency
		reported		deduction as
				adjusted
1935	$ 25,000	$ 30,944.86	$ 3,910.80	$ 61,450.21	$ 2,500.53
1936	35,000	40,267.88	6,320.76	79,075.88	3,020.80
1937	34,200	32,959.04	4,527.08	82,584.46	6,464.50
1938	100,550	34,534.05	10,531.27	156,980.97	5,807.03
1939	14,200	22,477.22		75,338.58	12,241.50

Wm. Fleming, trustee, filed a petition with the Board of Tax Appeals for a redetermination of the 1935 and 1936 deficiencies, notice of which had been mailed on July 14, 1938, and the proceeding became Docket No. 95061. Two questions were there presented and decided, namely, (1) whether petitioner was entitled to apply the entire amount of receipts from a certain oil payment owned by him to liquidate the cost before reporting any of such receipts as taxable income, and, (2) whether petitioner was entitled to deduct the full amount of the depreciation and depletion allowance made for the trust property during the taxable year or only that portion which represented the percentage of trust income retained by the petitioner. The Board sustained respondent. Its opinion is reported at 43 B. T. A. 229. Thereafter the Board's judgment was reviewed and affirmed by the Circuit Court of Appeals for the Fifth Circuit. The Circuit Court's opinion is reported at 121 Fed. (2d) 7. The deficiencies for the fiscal years ended August 31, 1935 and 1936, were paid with interest on April 4, 1941.

Wm. Fleming, trustee, also sought a redetermination of the 1937 and 1938 deficiencies, notice of which had been mailed on November 6, 1940. This proceeding became the Board's Docket No. 106260, in which the only contested issue was whether certain intangible drilling and development costs were deductible as a business expense or should be capitalized. Respondent's determination was approved by the Board and its judgment was affirmed by the Circuit Court of Appeals for the Fifth Circuit in a case reported at 135 Fed. (2d) 701. The deficiencies for the fiscal years ended August 31, 1937 and 1938, were paid on November 28, 1942. No part of the income taxes or interest payments made by Wm. Fleming, trustee, as above set forth, have been refunded or credited to any account, nor has respondent offered so to do. Notice of a determination of income tax deficiency for the fiscal year ended August 31, 1939, was mailed to Wm. Fleming, trustee, on November 13, 1942.

On April 10, 1940, petitioner and his wife filed claims for the refund of the gift tax and interest paid by them in respect of the year 1934. A statement attached to the printed claims included the following:

Donors considered and still believe that they made taxable gifts as aforesaid. But recent decisions by the Supreme Court of the United States, particularly Sanford's Estate vs. Commissioner and Rasquin v. Humphreys, both decided November 6, 1939, might lead to the conclusion that no taxable gifts were made by the donors, or either of them, by the transfers above described. Accordingly, they ask that the matter be reviewed and refunds made of the taxes and interest so paid.

The respondent rejected Mrs. Fleming's claim for refund on May 29, 1940. Petitioner's claim was made the subject of correspondence, resulting in conferences out of which no agreement was reached. A deputy commissioner had requested the submission of gift tax returns for the years here in question as a condition to the consideration of the claim for refund for the 1934 gift tax and interest. Petitioner declined to file such returns upon the advice of his attorney, who was familiar with the facts stated herein. Ultimately the notice of deficiency forming the basis for the present proceeding was mailed to petitioner. No part of the gift tax and interest for the year 1934 paid by petitioner or his wife ever has been refunded or credited to them. The notice of deficiency sets forth an overassessment against petitioner of $ 5,577.85 in gift tax for the year 1934. The letter of explanation accompanying the notice shows an overassessment of $ 7,413.62, the full amount paid as gift tax for 1934, but states that $ 1,835.77 thereof is barred by the statute of limitations.

In the explanatory statement accompanying the notice of deficiency respondent states that in making the determination of gift tax liability careful consideration was given to petitioner's protest filed to the Bureau's thirty-day letter; also that, since no gift tax returns for the years in question were filed claiming specific exemptions, the computations of tax were made without regard thereto.

The protest in question is a part of the stipulated facts. Petitioner's protest sets forth as an alternative reason against the proposed determination of the deficiencies herein the failure of respondent "to allow credit for the statutory specific exemption as to gifts." The protest also contains the following statement:

* * * It may be true that in his (petitioner's) 1934 return he made no claim for a specific exemption, but this was because he believed that he had made a taxable gift in 1933 (duly reported by him) which exhausted his exemption. But if the gift in 1934 was not a taxable gift, neither was that in 1933, so the exemption would be available for use in 1935 and subsequent years. This of itself would wipe out any deficiency due under any theory for 1935, 1936 and 1937, and would materially reduce that asserted for 1938 and 1939.

Mary D. Fleming filed income tax returns for the calendar years 1935 and 1936 reporting as income the distributions received from Wm. Fleming, trustee. Mary and her husband reported as community income such distributions received in 1937, 1938, and 1939. Income taxes were paid each year. In due course each of the returns was investigated and adjustments in income were proposed by respondent. As to each year it was determined that the depletion and depreciation allowances made with respect to properties owned by Wm. Fleming, trustee, should be allocated between Wm. Fleming, trustee, and Mary on the basis of the income distributed. For the years 1937, 1938, and 1939 respondent determined that all the net distributions from Wm. Fleming, trustee, constituted the separate income of Mary and not community income. As a result of these adjustments it was determined that Mary had overpaid her 1935 and 1936 income taxes, and refunds were made on February 6, 1942, after the judgment respecting the tax of Wm. Fleming, trustee, for the corresponding years had become final. Also as a result of these adjustments, on November 6, 1940, a deficiency was determined against Mary for the years 1937 and 1938. She appealed to the Board and the proceeding, Docket No. 106259, was consolidated with Docket No. 106260 and disposed of by the Board and by the Fifth Circuit Court of Appeals as stated above. The issues other than that pertaining to the treatment of intangible drilling and development costs had been disposed of by the parties and, therefore, were not considered by the Board and the Circuit Court of Appeals. The deficiencies found due by Mary for the years 1937 and 1938, in the respective amounts of $ 688.94 and $ 857.14, were duly assessed and paid on November 28, 1942. The adjustments made in 1939 resulted in the determination of a deficiency in Mary's income tax of $ 484.10, notice of which was mailed to her on November 13, 1942.

Neither Mary nor her husband ever have claimed that she, or they, were not taxable upon the amounts distributed to Mary by Wm. Fleming, trustee. Likewise, respondent in his determinations and actions respecting Mary's income tax liabilities never has eliminated, or offered to eliminate, from her taxable income any part of the distributions except amounts representing an aliquot portion of the depreciation and depletion allowances upon trust property. Mary and her husband have not claimed and respondent has not offered to refund any of their income taxes for the years 1935 through 1939 on the theory that they were not taxable on distributions from Wm. Fleming, trustee.

Petitioner and his wife filed individual income tax returns on the community property basis for the years 1934 to 1939, inclusive, and paid the income taxes disclosed by these returns. Each of the returns was made the subject of an investigation by respondent, through his agents, the first report upon investigation being dated November 18, 1936. After the customary procedure, respondent determined deficiencies in individual income taxes for the years 1934, 1935, and 1936 against petitioner and his wife. They appealed to the Board for a redetermination of such deficiencies. The only issues presented for decision in the consequent proceedings were (1) whether certain oil payments constituted income of the Fleming-Kimbell Corporation or the income of petitioner and his wife and, (2) whether respondent erroneously limited a certain loss deduction. The Board's opinion is reported at 41 B. T. A. 940. Decisions fixing the deficiencies were thereafter entered and the deficiencies paid. Deficiencies for 1937 and 1938 income taxes were agreed upon and petitioner and his wife on December 20, 1940, executed a waiver of restrictions on assessment and collection of the deficiencies on Treasury Form 870. Respondent's representative at the conferences preceding this agreement had no knowledge of the claim for refund of the gift taxes filed by petitioner April 8, 1940, which is described in some detail above.

After a reexamination of the 1937 and 1938 income tax returns of petitioner and his wife, a supplemental report covering those years was made on November 24, 1941, and May 24, 1941, respectively. The original report on the 1939 returns was made on August 13, 1941. In those reports the claim was made for the first time that petitioner was taxable upon part of the income received by Wm. Fleming, trustee. Deficiencies were determined against petitioner and his wife for the year 1938 predicated entirely upon the theory that they should have reported, as a part of their community income, the net income reported by Wm. Fleming, trustee, for the corresponding taxable periods. Petitioner and his wife on April 26, 1942, filed petitions with the Board seeking redetermination of the 1938 deficiencies and the proceedings were assigned Docket Nos. 110692 and 110693. Thereafter the parties executed by their respective attorneys and filed with the Board a stipulation in connection with the two causes, as follows:

It is hereby stipulated and agreed that there is no deficiency in Federal income tax due from, or overpayment due to, this petitioner for the taxable year 1938, and that the Board may enter its decision accordingly.

On July 13, 1942, the Board entered the following decision in each case:

Under written stipulation signed by counsel for the parties in the above entitled proceeding and filed with the Board on July 10, 1942, it is

Ordered and Decided: That there is no deficiency or overpayment of income tax for the calendar year 1938.

Subsequently respondent determined deficiencies in income tax against petitioner and his wife for the year 1939. These deficiencies were based in part upon the theory that petitioner and his wife were liable for tax on the income of Wm. Fleming, trustee. Proceedings arising from these determinations are pending.

Pursuant to negotiations carried on by petitioner and applications therefor made by Mrs. Fleming, two single premium annuity and two single premium life insurance contracts were issued on or about January 3, 1938, upon Mrs. Fleming's life. The premiums were paid by check signed by petitioner and drawn upon community funds in a bank account under petitioner's name but from which Mrs. Fleming also was authorized to, and did, draw funds. Mrs. Fleming was not versed in business affairs and petitioner invariably handled the business activities carried on by the community.

The annuities provided for annual payments of $ 933.58 and $ 310.08, respectively, during the lifetime of Mrs. Fleming and the premiums paid therefor were, respectively, $ 13,644.90 and $ 4,508.50. Only three payments were made under each contract and each payment was deposited in petitioner's bank account and used for ordinary purposes. The life insurance policies were in the principal sums of $ 30,000 and $ 10,000, respectively, and the premiums were $ 18,155.10 and $ 6,091.50, respectively. No physical examination was required of Mrs. Fleming and the insurance policies would not have been issued except for the simultaneous purchase of the annuity contracts. Mary was made the primary beneficiary of both policies.

By the terms of both policies the right to change the beneficiary and the mode of settlement was reserved to the insured. The policies also contained the standard provisions regarding the right of the insured to borrow on the policies and surrender them for a cash value. Petitioner previously had taken out insurance upon his own life in an even larger sum, which policies also were paid for with community funds, contained the usual provisions as to the insured's powers, and constituted Mary the primary beneficiary.

Petitioner's chief reason for causing the policies upon Mrs. Fleming's life to be written was his understanding that the $ 40,000 to be paid thereunder would be exempt from the Federal estate tax. He gave no thought to the powers granted the insured under the terms of the policies and he did not intend by his actions in obtaining the annuities and insurance policies to make a gift to his wife. Mrs. Fleming in fact did not attempt to exercise any of the powers stated to vest in her under the terms of the policies.

None of the policies or contracts contained any provision purporting to make it, its proceeds, or any rights therein the separate property of Mrs. Fleming.

OPINION.

The basic issues raised by the original pleadings are whether petitioner made gifts by reason of the distribution of income from a trust of which he was a donor and the trustee and, if so, whether he is liable for penalties for failure to file gift tax returns. However, petitioner pleads res judicata and estoppel as a bar to the consideration of the basic issues. It is necessary, therefore, to first pass upon these pleas, for, if they can be sustained, then the basic questions become moot.

Petitioner asserts that our decision in Docket No. 110692 is res judicata as to the taxability as a gift of petitioner of one-half the distributions of Wm. Fleming, trustee. Docket No. 110692 involved the determination of an income tax deficiency against petitioner for 1938 based solely upon the theory that he was taxable upon one-half the income of Wm. Fleming, trustee. Decision of no deficiency was entered. Petitioner argues that such decision conclusively determines not only that there was no additional income tax due from him for 1938, but that his transfers in trust in 1933 and 1934 constituted completed gifts to his daughter when made. This contention is without merit to the extent that it includes the gift question -- and that is the only one with which we are here concerned. The decision of no deficiency in Docket No. 110692 was entered pursuant to a written stipulation authorizing us so to do. We were not called upon to resolve the question there posed by the pleadings. A judgment based upon a stipulation filed in complete settlement of a tax case is not a decision on the merits which will support a plea of res judicata raised in a proceeding involving a different cause of action. Margaret A. C. Riter, 3 T.C. 301">3 T. C. 301, and authorities cited therein.

Secondly, petitioner asserts that the judgments entered in the Board's Docket Nos. 95061 and 106260 and affirmed by the Fifth Circuit Court of Appeals at, respectively, 121 Fed. (2d) 7, and 135 Fed. (2d) 701, are res judicata of the basic issues here. We do not agree. The issues which were presented and decided in the cases relied upon are stated in the findings of fact and will not be repeated here. It is necessary to note only that such issues in no way questioned the propriety of taxing to the fiduciary the income of Wm. Fleming, trustee, less the distributions to the beneficiary and other proper deductions. Moreover, the cases did not involve gift taxes. In considering the application of the doctrine of res judicata to a different cause of action, one inquiry must be "whether the point or question to be determined in the later action is the same as that litigated and determined in the original action." (Emphasis supplied.) Tait v. Western Maryland Ry. Co., 289 U.S. 620">289 U.S. 620. In Hartford-Empire Co. v. Commissioner, 137 Fed. (2d) 540, affirming 43 B. T. A. 113, the court said: "How far a decision upon a question of law can be an estoppel in a later action upon a different cause of action is a vexed question, but no one has ever suggested that it can extend to matters not actually litigated." (Emphasis supplied.) Since in Docket Nos. 95061 and 106260 neither Wm. Fleming, trustee, nor respondent made any contention respecting the propriety of taxing the trust net income to the trustee, it follows that such contention was not made the subject of litigation in those proceedings. Nor should it be supposed that, in redetermining a deficiency, we examine and pass upon each item which goes into the computation of the taxpayer's tax liability. Such is not our function. On the contrary, we consider only those questions which are presented by the pleadings and are not conceded or abandoned prior to the submission of the case. The question as to whom the trust income was properly taxable based upon the terms of the trust instrument was not decided in the prior proceedings and, therefore, even assuming a decision on this point would govern gift tax liability, the judgments are not a bar to the consideration of this case on its merits. Blaffer v. Commissioner, 134 Fed. (2d) 389; Britt v. Commissioner, 114 Fed. (2d) 10; Harvey Coal Corporation v. United States, 35 Fed. Supp. 756;W. D. Johnson, 1 T. C. 1041; E. T. Weir, 47 B. T. A. 974. The doctrine of res judicata is not applicable to estop a subsequent cause of action where the issues are not identical. Louisville Property Co. v. Commissioner, 140 Fed. (2d) 547, or where the factual situations and legal situations are not the same in the two cases. Leicht v. Commissioner, 137 Fed. (2d) 436.

As a second ground barring the consideration of the case on its merits, petitioner urges upon us the application of equitable principles which may be termed quasi estoppel. It is not his contention that there exists here an estoppel in the usual sense of misrepresentation and reliance thereon, but, rather, that respondent is prevented from pressing the deficiencies involved in the instant proceeding because of his alleged inconsistent positions respecting past deficiencies determined against members of the Fleming family.

This contention might be disposed of by repeating the following language from the Supreme Court's opinion in Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418">320 U.S. 418:"The Internal Revenue Code, not general equitable principles, is the mainspring of the Board's jurisdiction." Thus we conceive it to be our function in this case to decide whether petitioner made taxable gifts within the meaning of section 501 of the Revenue Act of 1932 during the years in question, not whether respondent in equity and good conscience should be barred from taking the stand which he does, regardless of its correctness.

In any event, it is clear that petitioner's contention lacks merit. It is true that respondent assessed income taxes on the income of Wm. Fleming, trustee, against Wm. Fleming, trustee, or Mary, the beneficiary, even after the Supreme Court had handed down its decisions in Sanford's Estate v. Commissioner, 308 U.S. 39">308 U.S. 39, and Rasquin v. Humphreys, 308 U.S. 54">308 U.S. 54, wherein gifts in trust were held incomplete and not subject to gift tax when the donor retained power to change the beneficiary. However, in so doing, respondent did not necessarily take a position inconsistent with his present one, i. e., that the transfers by petitioner to Wm. Fleming, trustee, were incomplete and that taxable gifts thus occurred when distributions were made to Mary. We say this because respondent was then dealing with the taxation of income, while here he is dealing with the taxation of gifts, where the primary question is whether there have been completed gifts inter vivos. In the latter situation the Sanford case requires the gift tax to be correlated with the estate tax, without regard to what happens under the income tax. Higgins v. Commissioner, 129 Fed. (2d) 237; certiorari denied, 317 U.S. 658">317 U.S. 658, and see the excellent discussion therein regarding the interrelation of the income, estate, and gift taxes and the many perplexities thereby presented.

Moreover, if an implied interpretation could be said to have been placed upon the effect of the trust taxwise in the income tax matters, it was not respondent who was responsible for it, but the taxpayers themselves. Wm. Fleming, trustee, and Mary voluntarily reported the trust income respectively retained and received in distribution. Adjustments made by respondent merely effected the allocation of deductions and other minor changes. Thus, any alleged position taken by respondent respecting the taxation of the Wm. Fleming, trustee, income, so far as concerns the returns of the fiduciary and beneficiary, was induced by the taxpayer. Naturally, it was to the Fleming family's advantage to divide their income between Wm. Fleming, Anna Maud, Mary, and Wm. Fleming, trustee. But we do not think public policy would be best subserved in allowing taxpayers to impart to their acts tax consequences disputable only if immediately questioned by respondent. Finally, assuming arguendo that respondent did take a positive position in connection with transfers to Wm. Fleming, trustee, this fact, in the present circumstances, does not disable him from adopting a different view now. In the absence of a closing agreement, valid compromise, final adjudication, or the running of the statute of limitations, the Commissioner may make new and different assessments against the same taxpayer, for the same year, and in respect of the same type of tax. Oak Worsted Mills v. United States, 36 Fed. (2d) 529; 38 Fed. (2d) 699; affd., 282 U.S. 409">282 U.S. 409; Laher Auto Spring Co. v. United States, 5 Fed. Supp. 38;Mt. Vernon Trust Co. v. Commissioner, 75 Fed. (2d) 938; Seeley v. Helvering, 77 Fed. (2d) 323; H. S. Paulus, 30 B. T. A. 608; affd., 91 Fed. (2d) 192. It perforce follows that he may make different assessments on different theories in the far less compelling situations, such as we have here, where other taxpayers, years, and types of taxes are involved. That Congress recognized that both taxpayers and the Commissioner sometimes take inconsistent positions in the treatment of taxes is apparent from its enactment of section 820 of the Revenue Act of 1938, now section 3801 of the Internal Revenue Code, the purpose of which is to "take the profit out of inconsistency." See Senate Finance Committee Report, 75th Cong., 3d sess., S. Rept. 1567.

We conclude and hold that the doctrines of res judicata and estoppel are not available to petitioner in this proceeding. Accordingly, we proceed to a consideration of the controversy on its merits.

As suggested above, it is respondent's contention that petitioner is liable for a gift tax on one-half of the amounts distributed annually to Mary from income of the trust of which petitioner and his wife were grantors and under which Mary was the beneficiary. This contention is based necessarily upon the proposition that the gifts in trust of $ 100,000 and the 1,200 shares of F. H. E. Oil Co. stock were incomplete as to the one-half portion transferred by petitioner. It is this proposition which first must be examined. Petitioner denies that his original gifts were incomplete and, in the alternative, asserts that, in any event, the incompleteness attached only to one-fourth of his contributions to Wm. Fleming, trustee, this being the maximum amount which he could divert to other than religious, charitable or educational institutions.

Petitioner and his wife created the trust known as Wm. Fleming, trustee, and provided the corpus from their community property. The parties agree that as a consequence one-half the corpus is deemed to have come from petitioner and one-half from Mrs. Fleming. Petitioner was constituted trustee and, as such, was specifically given the power to make gifts at any time from the trust property or its revenues to charitable, religious or educational institutions or enterprises and relatives of the grantors. Total gifts to relatives could not exceed 25 percent of the corpus of the estate, including accumulated revenues. Otherwise the amount of the gifts which could be made was in the trustee's absolute discretion. Manifestly, this power was so broad as to enable petitioner, in his capacity as trustee, to divert the entire corpus and income of Wm. Fleming, trustee, from the named beneficiary. It is well settled that a gift in trust with power in the donor to revoke it is not a taxable gift, since the transfer is incomplete. Sanford's Estate v. Commissioner, supra;Rasquin v. Humphreys, supra;Hesslein v. Hoey, 91 Fed. (2d) 954. Is the rule otherwise when the power to revoke is in the trustee who is the same individual as the donor? We think not. Welch v. Terhune, 126 Fed. (2d) 695. In Cockrell v. United States, 39 Fed. Supp. 148, the Court of Claims held a gift in trust to be incomplete where the grantor had reserved the power to grant the trustee additional power. Although the trustees were independent, the court pointed out that under the reservation the grantor might grant power to the trustees to change the beneficiaries and their distributive shares. Hence it held the doctrine of Sanford's Estate to be applicable. Certainly there is greater reason here for the application of the same doctrine. It can not be gainsaid that upon the will of petitioner alone depends Mary's eventual receipt of the trust corpus and income. There can be no distinction between his will as grantor and his will as trustee.

We are not impressed with petitioner's alternative contention that the incompleteness of his contributions attached only to so much thereof as could not be diverted to religious, charitable, or educational institutions. Petitioner has been able to point to no statutory law or case which would support this proposition. However, he asserts that it is supported by public policy and the liberal attitude of Congress and the courts toward gifts for such purposes. Assuming that philanthropic gifts are looked upon with favor, we fail to see how petitioner is helped here. If petitioner's position were sound, then Mary would be subject as donee to a gift tax on property which she might never possess, provided petitioner failed to pay the tax. In similar circumstances it was said in Sanford's Estate v. Commissioner, supra:

It can hardly be supposed that Congress intended to impose personal liability upon the donee of a gift of property, so incomplete that he might be deprived of it by the donor the day after he had paid the tax. Further, § 321 (b) (1), 43 Stat. 315, exempts from the tax, gifts to religious, charitable, and educational corporations and the like. A gift would seem not to be complete, for purposes of the tax, where the donor has reserved the power to determine whether the donees ultimately entitled to receive and enjoy the property are of such a class as to exempt the gift from taxation. * * *

and in Hesslein v. Hoey, supra:

The very day after creating the trust the settlor might exercise his reserved power by irrevocably appointing the corpus to a charity, to which a gift would be exempt from tax. Section 505, Revenue Act 1932 (47 Stat. 247, as amended [26 U. S. C. A. § 554]). We cannot believe that personal liability was meant to be imposed upon the originally named beneficiary in such a case. * * *

We think this language provides an adequate answer to this alternative contention of petitioner.

Still another alternative contention requires attention. Petitioner points to the fact that less than one-half the income from Wm. Fleming, trustee, actually was distributed to Mary in each year in question save in 1938. Since respondent assessed income taxes against Mary upon distributions received from Wm. Fleming, trustee, and collected and retained such taxes, petitioner asserts that respondent thus has allocated the distributions as coming from income arising from property contributed by Mrs. Fleming, as to which the original gifts were complete; that, accordingly, there have not been gifts in each year from petitioner to Mary, but that income from the portion of the contributions must be deemed to have been added to the corpus. Petitioner believes this to be the only theory by which "respondent's inconsistencies can be reconciled." He admits that the trust instrument contains nothing in connection with the allocation of distributions from particular sources of income where less than the whole income is distributed. This theory is novel and, as such, interesting, but it is not compelling. In the first place it assumes that respondent's positions as taken in the income tax cases and gift tax cases are inconsistent. But, as we have explained above, this is a premise which is not necessarily true. Secondly and also as discussed above, respondent normally can not be held to a particular course even as regards the same taxpayer and the same kind of tax liability, much less as regards different taxpayers and tax liabilities. Finally, if respondent can be said to have made any allocation of distributions, it must be by reason of his action in making the determination forming the basis for this proceeding, since his determination is presumptively correct. The present determination was made on the assumption that one-half the distributions represented income from the property contributed by petitioner. This seems eminently fair to us, since petitioner and his wife contributed equal portions of the original corpus of Wm. Fleming, trustee. It is also consistent with the result reached upon the question of allocating trust distributions to taxable and tax exempt income of a trust, a somewhat analogous situation. See J. Cornelius Rathborne, 37 B. T. A. 607; affd., 103 Fed. (2d) 301; 109 Fed. (2d) 463; Mrs. Georgie W. Rathborne, 37 B. T. A. 936.

The gifts upon trust, incomplete when made in 1933 and 1934, have not since become complete, for it is stipulated that no change in the terms of the trust instrument has been made and, accordingly, the powers rendering the gifts incomplete remain outstanding. On the other hand, Mary did receive distributions from the income of Wm. Fleming, trustee, in each of the years 1935 through 1939 and, to the extent that such distributions were made from income arising from the one-half of the trust property attributable to petitioner's transfers, they constituted gifts by petitioner to Mary upon which petitioner is liable for gift tax. Chas. F. Roeser, 2 T. C. 298; Leonard C. Yerkes, 47 B. T. A. 431. It is so held and respondent's determination to this effect is approved.

Since our holding that one-half of the amount distributed from the trust income to Mary in each of the years 1935 to 1939, inclusive, was a gift to her by petitioner is based on our construction that there was no completed gift under the trust agreement by petitioner in 1933 or 1934, or at all, it follows that there was no effective taking of a specific exemption by petitioner in respect of the conveyances in trust. Hence there was no exhaustion in whole or in part of the specific exemption allowable to petitioner in respect to gifts through the application thereof in gift tax returns erroneously made by petitioner in respect to the conveyances in trust in 1933 and 1934. Our conclusion in this regard is confirmatory of respondent's determination to the same effect in determining the deficiencies here involved. Also, pursuant to such determination and consonant therewith, respondent determined that the full amount paid by petitioner as a gift tax in respect of the conveyance in trust in 1934 constituted an overassessment. Had an amount been paid by petitioner as a gift tax in respect of the conveyance in trust in 1933, the same considerations upon which the overassessment for 1934 was determined would have obtained.

The statutory exemption is allowable to petitioner in respect of the gifts here involved if timely claimed by him. In his protest against the proposed determination of the deficiencies here involved petitioner assigned (alternatively) as one of the grounds of such protest that respondent failed to allow him credit for the specific exemption as to gifts and stated that the allowance of such exemption "would wipe out any deficiency due under any theory for 1935, 1936 and 1937, and would materially reduce that asserted for 1938 and 1939."

The protest in question antedated the deficiencies involved and the statements and representations therein relative to specific exemptions clearly indicate petitioner's insistence that if because of the distributions of trust income to his daughter it should be determined that he made gifts to her, he should be allowed the full amount of the specific exemption, applicable first to the year 1935 and then to each succeeding year until its exhaustion.

Petitioner made no claim for credit for specific exemption in a gift tax return applicable to the taxable years here involved or in his petition herein, apparently for the reason that according to his contention he made no gift in either of such years to which to apply the exemption. We hold against petitioner's contention in this regard, but we think he should have the benefit of the specific exemption on the ground that he claimed it in the alternative in his protest against the proposed deficiencies. Such exemption should be applied first to the gift in the year 1935 and consecutively to the gifts in the subsequent years until it is exhausted.

The second basic question is whether petitioner is liable for a penalty of 25 percent of each year's tax for failure to file gift tax returns. Section 3612 (d) (1) of the Internal Revenue Code provides for the addition of an amount not to exceed 25 percent of the tax in instances where a tax return is not made and filed within the prescribed time. This section is applicable in the case of failure to make and file gift tax returns. Sec. 1018, Internal Revenue Code. So far as pertinent here, section 519 of the Revenue Act of 1932 is the same as section 3612 (d) (1) of the Internal Revenue Code. Petitioner filed no gift tax returns for the years 1935 through 1939, although, as we have held, he made taxable gifts in each of such years. In these circumstances the addition to the tax is mandatory. Chas. F. Roeser, supra.Petitioner did furnish respondent with all information requested concerning the trust and its management, and it is contended that by so doing petitioner must be deemed to have filed informal returns, thus avoiding the imposition of the additional tax. But the statute permits of no substitute for the filing of a formal return. Furthermore, as we said in the Roeser case, "The question of reasonable cause arises only in the case of delinquent returns, not when taxpayer has filed no return whatever." We have no alternative but to sustain respondent on this issue.

The final question was raised by amended answer. At petitioner's instance, but upon Mrs. Fleming's formal application, single premium life insurance and annuity contracts were written on her life in the year 1938. The primary beneficiary under the insurance contracts was Mary, the Flemings' daughter. Premiums which totaled $ 42,431.50 were paid for out of community funds. By the terms of the insurance contracts the usual incidents of ownership were reposed in Mrs. Fleming. She was, of course, the annuitant under the annuity contracts. Respondent contends that petitioner thereby made a gift to Mrs. Fleming measured by one-half the premiums or one-half the value of the contracts, being $ 21,215.75. The resultant issue is drawn by petitioner's denial. On this issue the burden of proof falls upon respondent.

Respondent in his brief has cited numerous cases which support general propositions of law, as, for example, that insurance contracts may be the subject of gifts and that a husband may make a gift of his interest in community property to his wife. Petitioner for the most part, does not controvert the correctness of such propositions, but he does very properly point out that we are not concerned with what he legally could have done, but rather with what was done in this particular instance.

In determining whether the act of purchasing the instant insurance policies must be deemed a gift measured by one-half of the premiums paid, we look to the attendant legal consequences from the standpoint of the ownership of the policies after the completion of the transaction. Was Mrs. Fleming thereby invested with complete ownership of the choses in action represented by the insurance contracts, or did petitioner share in the ownership? Or, putting it another way, did the contracts become the separate property of Mrs. Fleming or did they become the property of the community? Under the express terms of the contracts themselves Mrs. Fleming was accorded customary rights as insured, such as the right to change beneficiaries, surrender the policies for a cash value, and borrow from the insurers upon the security of the policies. These rights are commonly referred to as incidents of ownership. As such they are indicative of separate ownership in Mrs. Fleming and respondent bases his contention largely on their inclusion in terms in the policies in question. However, the express terms contained in the policies are not the sole provisions to be considered in determining the rights and obligations of the parties thereunder. "Contracts of insurance are presumed to have been made with reference to the law of the land, including the statutory laws which are in force and are applicable, and such laws enter into and form a part of the contract, as much as if actually incorporated therein." Couch-Cyclopedia of Insurance Law, para. 150. See also First Texas Prudential Insurance Co. v. Sorley (Tex. Civ. App.), 272 S. W. 346 (1925);Germania Life Insurance Co. v. Peetz (Tex. Cir. App.), 47 S. W. 687 (1898). We presume that the parties here contracted with reference to the community property law of Texas. Hence, the express rights given Mrs. Fleming under the contracts must be read in conjunction with any limitation upon such rights which Texas law may demand.

Some confusion has existed in the Texas courts respecting property interests arising out of the purchase of life insurance. Older cases are difficult if not impossible of reconciliation. See Huie, Community Property -- Life Insurance (1939), 17 Tex. Law Review 121, for an analysis which has been cited with approval by several recent Texas decisions. Late cases, however, settle many of the questions which have arisen between husband and wife as to property rights implicit in such contracts. Each of the following cases involved life insurance taken out on the husband's life with premiums having been paid from community funds. In Womack v. Womack, 172 S. W. (2d) 307 (1943), the cash surrender value of the policies was held to be community property. To the same effect is Locke v. Locke (Tex. Civ. App.), 143 S. W. (2d) 637 (1940), and Berdoll v. Berdoll (Tex. Civ. App.), 145 S. W. (2d) 227 (1940), but limited, in the last mentioned case, to the same proportion thereof as premiums paid from community funds bore to premiums paid from the husband's separate funds. In Blackmon v. Hansen, 169 S. W. (2d) 962 (1943), one-half of the proceeds on insurance payable to the husband's estate was held to be property of the wife. The Womack case also involved, as here, a policy taken out on the life of the wife the premiums on which were paid from community funds. The cash surrender value of this policy was held to be community property. In our opinion these recent authorities require the conclusion that property rights evidenced by life insurance contracts on the life of either the husband or the wife become community property under Texas law when the cost is met with community funds. See Joe J. Perkins, 1 T. C. 982. They become such despite the fact that the policy provisions in terms purport to grant such rights solely to the insured. We find that the instant policies, by the fact of their purchase and issue under the present circumstances, did not become the separate property of Mrs. Fleming. Hence, their purchase did not constitute a gift to be measured by any amount.

The cases cited by respondent to the effect that the irrevocable assignment of insurance policies to another constitutes a gift of the value of the policies are not in point for the obvious reason that here there was no assignment, irrevocable or otherwise.

There is even less in the record to support the imposition of a gift tax upon one-half of the cost of the annuities. They were purchased with community funds, became community property and their avails constituted community funds. In fact, the annual payment went back into the same account from whence was drawn the money for the original premiums. Any tie-up between their purchase and the writing of the insurance is immaterial to the issue in view of our holding with respect to the insurance.

Respondent's prayer that petitioner's gift tax deficiency and penalty for 1938 be increased by including in the computation of gifts for that year an additional $ 21,215.75 is denied.

Decision will be entered under Rule 50.