Opinion
Docket No. 13964.
1950-10-6
FREDERIC E. CAMP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Marvin Lyons, Esq., Sinclair Hatch, Esq., and Charles I. Pierce, Esq., for the petitioner. Paul P. Lipton, Esq., for the respondent.
1. GIFT TAX— TRANSFER IN TRUST— Where a transfer in trust in 1932 was made with a reserved power in the grantor to revoke in whole or in part in conjunction with a contingent remainderman who agreed to comply with grantor's wishes as to subsequent changes, held not a completed gift of the entire trust property.
2. Where by amendment on December 11, 1937, the grantor's wife, who as the present income beneficiary had a substantial adverse interest, was substituted as the only person in conjunction with whom petitioner could thereafter revoke the trust, held, a completed gift of the entire trust property. Held, further, that payments of trust income to the wife prior to such amendment constituted annual gifts in the years such payments were made. Marvin Lyons, Esq., Sinclair Hatch, Esq., and Charles I. Pierce, Esq., for the petitioner. Paul P. Lipton, Esq., for the respondent.
Respondent determined gift tax deficiencies in the amounts of $22,867.07 and $6,404.36 for the calendar years 1937 and 1943, respectively.
Petitioner claims overpayments in the amounts of $22,800 gift tax plus $12,996 interest thereon for 1937 and $6,400, gift tax plus $1,3144 interest thereon for 1943 which amounts were paid on September 15, 1947, four months after the filing of the petition herein, solely to stop the running of interest. Petitioner also filed waivers on that date.
Respondent affirmatively alleges errors in his determination and by reason thereof claims increased gift tax deficiencies in the total amounts of $78,537.08 for 1937 and $8,872.85 for 1943.
The primary issues involved herein are (1) whether by a transfer in trust on February 1, 1932, with a reserved power of revocation in conjunction with certain contingent beneficiaries, petitioner made a completed gift of the entire trust corpus on that date (as alleged by petitioner), and if not, (2) whether by an amendment to the trust on December 11, 1937, whereby petitioner's reserved power of revocation was in conjunction only with the present life beneficiary, petitioner made a completed gift of the entire trust corpus (as affirmatively alleged by respondent). An alternative issue is whether by the amendment on December 11, 1937, petitioner made a completed gift only of an interest in the income of the trust (as determined by respondent in the deficiency notice).
The various corollary issues raised by the parties involving, inter alia, the value of the gift, if any, in 1937, the unused portion of the specific exemption; the amount of trust income which constituted annual gifts, if any, to the life beneficiary in the taxable years; and the amounts of net gifts for years preceding the taxable years will be more fully set forth in the opinion to the extent that becomes necessary in the light of our determination on the primary issues. The petitioner's assignment of error alleging unconstitutionality of the asserted gift tax deficiency for 1937 is deemed to have been abandoned since it was not prosecuted by petitioner either at the hearing or on brief.
The proceeding has been submitted upon the pleadings, testimony, and a stipulation of facts with appended exhibits. The facts, as stipulated are so found and included as part of our findings of fact.
FINDINGS OF FACT.
Petitioner is an individual residing at East Blue Hill, Maine. He filed gift tax returns for the periods here involved with the collector of internal revenue for the district of Maine.
Petitioner is the posthumous son of Frederic E. Camp who died testate in December 1903. Under that decedent's will one-half of his estate was distributed to petitioner in 1928 in the amount of approximately $1,000,000, and the income from the other half was payable to petitioner's mother, Johanna Maria Camp (hereinafter referred to as Johanna), who was born November 15, 1868. in 1908 petitioner's mother Johanna married Horace Bullock and of that marriage was born on February 24, 1909, petitioner's half brother, Horace Ridgely Bullock (hereinafter referred to as Ridgley). Johnanna's second husband, Horace Bullock, died in 1926, leaving his estate of several hundred thousand dollars to his widow.
On October 30, 1931, petitioner married Alida Donnell Milliken (hereinafter referred to as Alida), who was born on November 3, 1908. No children have been born of that marriage, but petitioner and his wife have adopted four children as follows:
+---------------------------------------------------+ ¦ ¦ ¦Date of ¦ +---------------------+---------------+-------------¦ ¦Name ¦Date of birth ¦Adoption ¦ +---------------------+---------------+-------------¦ ¦Nicholas Ridgely Camp¦June 23, 1936 ¦Jan. 19, 1937¦ +---------------------+---------------+-------------¦ ¦Susan Milliken Camp ¦June 22, 1937 ¦Jan. 2, 1938 ¦ +---------------------+---------------+-------------¦ ¦Donnell McKesson Camp¦July 11, 1940 ¦Jan. 31, 1941¦ +---------------------+---------------+-------------¦ ¦Catherine Floyd Camp ¦June 14, 1942 ¦Oct. 3, 1942 ¦ +---------------------------------------------------+
On February 24, 1930, petitioner transferred securities having a value of approximately $100,000 to trustees to pay the income to Ridgley for life and the principal to his issue or if none, then to petitioner or his issue. Petitioner reserved to himself alone the power to revoke, change, modify or annual that trust.
On February 1, 1932, petitioner executed a trust indenture with the Bankers Trust Co. of New York City as trustee and transferred to the latter, as corpus of the trust, property having a fair market value of $416,131.72 on that date. Thereafter petitioner made no additions to the corpus of the trust. The petitioner's purpose in creating the trust was to provide an income for his wife, Alida, and the remainder to his surviving issue with retention of command and control over the trust property to enable him to recapture such property for his own benefit or further disposition to others if for any reason Alida ceased to be his wife during his lifetime. Consistent with that purpose and at the time of the execution of the trust indenture petitioner and his half brother, Ridgely (in conjunction with whom he could revoke or modify the trust as hereinafter set out), had a mutual understanding that Ridgely would at any time fully comply with the desires of petitioner with respect to any subsequent changes he might wish to make as to the provisions of the trust.
The trust indenture provided that the income thereof should be payable to petitioner's wife, Alida, for life and upon her death the principal should be paid to the then living issue of petitioner per stirpes; in default of such issue, the corpus was to remain in trust and the income paid to petitioner's mother Johnanna, during her life and upon her death the principal paid to petitioner's half brother, Ridgely, if living, otherwise to his surviving issue, if any, and if none, then to the trustees of Princeton University for educational purposes. The trust indenture further provided that
TENTH: This indenture shall not be subject to revocation, alteration or modification by the Donor, alone, but nevertheless, he may, in conjunction with either H. RIDGELY BULLOCK or JOHNANNA R. BULLOCK, beneficiaries hereunder, during the continuance of this trust, by instrument in writing, executed and acknowledged by the Donor and either the said H. RIDGELY BULLOCK or the said JOHNANNA R. BULLOCK, in the manner required for a deed of real property, so as to enable it to be recorded in the State of New York, and delivered to the Trustee, modify or alter in any manner, or revoke in whole or in part, this indenture and the trusts then existing, and the estates and interests in property hereby created, and in case of such revocation said instrument shall direct the disposition to be made of the trust fund, or of the portion thereof affected by such revocation, and the Trustee shall make, execute and deliver such instruments, if any, and make such conveyances and transfers of property as may be necessary or proper in order to carry the same into effect, and no one shall have any right, interest or estate under this indenture except subject to such modification, alteration or revocation.
On August 30, 1934, petitioner, in conjunction with Ridgely, exercised his power to alter and amend by inserting a provision that Alida should receive the income from the trust only as long as she continued during his lifetime to remain his wife and to reside with him.
On December 11, 1937, petitioner, in conjunction with Ridgely, exercised the power to alter and amend to provide (1) that the term ‘issue of the Donor‘ should include petitioner's adopted son Nicholas Ridgely Camp, and such other children as the donor and his wife might legally adopt and (2) the above-quoted power to revoke alter or modify was eliminated and substituted in lieu thereof was a provision containing the same words except that the name of Alida Donnell Milliken Camp was substituted for the names of H. Ridgely Bullock and Johnanna R. Bullock.
On June 6, 1946, petitioner, in conjunction with Alida, exercised the power to modify by striking the above-mentioned power of revocation in conjunction with his wife, Alida, and inserting in lieu thereof the following:
TENTH: This indenture shall not be subject to revocation, alteration or modification.
Pursuant to the provisions of the trust created by petitioner February 1, 1932, the trustee paid to Alida the following amounts from the net income of the trust:
+-------------------------------------+ ¦1932 (subsequent to June 6)¦$9,554.80¦ +---------------------------+---------¦ ¦1933 ¦18,964.32¦ +---------------------------+---------¦ ¦1934 ¦18,698.10¦ +---------------------------+---------¦ ¦1935 ¦20,492.53¦ +---------------------------+---------¦ ¦1936 ¦17,545.72¦ +---------------------------+---------¦ ¦1937 (prior to Dec. 11) ¦17,828.34¦ +---------------------------+---------¦ ¦1938 ¦17,819.34¦ +---------------------------+---------¦ ¦1939 ¦17,773.81¦ +---------------------------+---------¦ ¦1940 ¦17,516.20¦ +---------------------------+---------¦ ¦1941 ¦16,962.89¦ +---------------------------+---------¦ ¦1942 ¦16,597.39¦ +---------------------------+---------¦ ¦1943 ¦16,342.56¦ +-------------------------------------+
The fair market value of the trust corpus was $518,089.76 on December 11, 1937. On the same date, the value of the income from such trust (1) payable for the life of a woman age 29 (petitioner's wife) amounted to $356,492.38; (2) payable for the life of a woman age 69 (petitioner's mother) amounted to $137,045.31; (3) payable during the joint lives of a woman of 29 and a woman of 69 was $129,936.91; and (4) payable during the remaining life of a woman of 69, from and after the death of a woman of 29, was $7,108.19.
In his deficiency notice with respect to 1937, respondent determined that petitioner's amendment to the trust on December 11, 1937 (making his wife the person in conjunction with whom he could thereafter revoke or modify the trust), resulted in a gift to his wife of an interest in the income of the trust which gift had a value of $219,447.07 representing the difference between the values stated in (1) and (2) in the next preceding paragraph. That determination as to 1937 resulted in an increase in net gifts for years prior to 1943 and thus an asserted deficiency in petitioner's gift tax liability for other gifts made in 1943. It is stipulated that in the computation of any gift tax deficiency for the calendar year 1937 petitioner is entitled to an unused portion of the $40,000 specific exemption in the amount of $7,057.21.
OPINION.
TIETJENS, Judge:
This proceeding involves petitioner's gift tax liability for the year 1937, under section 501 of the Revenue Act of 1932,
and the year 1943, under section 1000 of the Internal Revenue Code.
SEC. 501. IMPOSITION OF TAX.(a) For the calendar year 1932 and each calendar year thereafter a tax, computed as provided in section 502, shall be imposed upon during such calendar year by any individual, resident or nonresident, of property by gift.(b) The tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States. The tax shall not apply to a transfer made on or before the date of the enactment of this act.
The primary issues relate to the year 1937 but also have a bearing upon the year 1943 in determining net gifts for prior years.
SEC. 1000. IMPOSITION OF TAX.(a) For the calendar year 1930 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. Gift taxes for the calendar years 1932-1939, inclusive, shall not be affected by the provisions of this chapter, but shall remain subject to the applicable provisions of the Revenue Act of 1932, except as such provisions are modified by legislation enacted subsequent to the Revenue Act of 1932.(b) The tax shall apply whether the transfer is in trust or otherwise whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States.
The petitioner's primary contention is that respondent erred in failing to determine that the transfer in trust on February 1, 1932, constituted a completed gift of the entire trust property because the grantor's reserved power of revocation was restricted by the required concurrence of either of two persons, his mother or half brother, each of whom has a substantial adverse interest. If, under the facts, that contention is correct, then the subsequent amendment to the trust indenture in 1937 is immaterial taxwise for the years involved herein, Estate of Leon N. Gillette 7 T.C. 219, for if there was a present transfer of property by gift in 1932, there was not another transfer of the same property in 1937. Cf. Burnet v. Guggenheim, 288 U.S. 280.
On the other hand, respondent's primary contention is that the transfer in trust on February 1, 1932, did not result in a completed gift of either corpus or income of the trust to any of the named beneficiaries, because petitioner grantor retained dominion and control thereof through a prior agreement by the half brother that he would comply fully with petitioner's wishes in any subsequent revocation or modification of the trust. Respondent's further primary contention is that by the amendment to the trust on December 11, 1937, petitioner made a completed gift of the entire trust property, having a fair market value of $518,089.76 on that date, because after such amendment petitioner's power of revocation could be exercised only in conjunction with his wife who, as the present life beneficiary, had a substantial adverse interest in the entire trust property.
In form, the trust indenture of February 1, 1932, created several separate beneficial interests in the trust property including, inter alia, the wife's present interest and the mother's contingent interest in the income of the trust and the half brother's contingent remainder interest in the corpus of the trust. In giving weight to the formal rights thus conferred by the trust indenture, special scrutiny must be given to the arrangement and the relationship of the beneficiaries to the petitioner-grantor in regard to his retained control over the trust property, Commissioner v. Prouty, 115 Fed. (2d) 331, for the reason that in considering tax consequences the essence of a completed gift by transfer in trust is the grantor's abandonment of dominion and control over the economic benefits of the property rather than any technical changes in title, and to the extent that the grantor retains the power to revoke the trust or recapture the property represented by any of the interests therein, the transfer is rendered incomplete as a gift until such power is relinquished. Smith v. Shaughnessy, 318 U.S. 176; Sanford's Estate v. Commissioner, 308 U.S. 39; and Burnet v.Guggenheim, supra.
From the time the trust was created on February 1, 1932, and until December 11, 1937, the petitioner's reserved power to revoke or modify the trust, either in whole or as to any of the various separate beneficial interests, was exercisable in conjunction with either his mother, the contingent income beneficiary or his half brother, a contingent remainderman. As to that period of the existence of the trust, the question presented is whether both of those persons had a substantial adverse interest in the disposition of the trust property or the income therefrom. It has been held that a substantial adverse interest means a direct legal or equitable interest but not necessarily one presently vested in possession and enjoyment Commissioner v. Prouty, supra, and technically, at least, the interest of the mother and half brother would seem to be substantially adverse, Estate of Leon N. Gillette, supra. However, bearing in mind the admonition of Helvering v. Clifford, 309 U.S. 331, and similar cases that we must look beyond legal technicalities, we have in the instant proceeding a state of facts bearing directly upon the execution of the trust indenture which leads us to the conclusion that in substance the half brother had no substantial adverse interest in the corpus or income of the trust.
Prior to the creation of the trust in controversy the petitioner in February 1930 transferred $100,000 in trust to pay the income therefrom to his half brother, Ridgely, for life and reserved to himself alone the power to revoke such trust. With regard to the trust in controversy the testimony establishes and we have found as facts: That petitioner's purpose was to provide an income for his wife, Alida, and the remainder to his surviving issue; that petitioner intended to retain such command and control over the trust property as to enable him to recapture the same if for any reason Alida ceased to be his wife during his lifetime; and that consistent with such purpose and upon the execution of the trust indenture, the petitioner and Ridgely had a mutual understanding that Ridgely would at any time consent to any changes in the trust as subsequently desired by petitioner. As further evidence of petitioner's purpose in creating the trust, the petitioner, in conjunction with Ridgely, in 1934 changed the original provision as to the payment of the income only as long as she continued to reside with him as his wife during his lifetime. As further evidence of mutual understanding between petitioner and Ridgely as to the latter's compliance with petitioner's subsequent desires to change the terms of the trust, Ridgely jointed in the execution of the amendment of December 11, 1937, which provided that the term ‘issue of Donor‘ should include petitioner's adopted children, thereby making the respective contingent interest of both Ridgely and Johnanna more remote, and further provided that petitioner's wife should be substituted in place of both Ridgely and Johnanna as the only person in conjunction with whom petitioner could thereafter revoke or modify the trust.
On this record we conclude that petitioner did not intend to make final disposition of the trust property at the time he created the trust; that petitioner's half brother, Ridgely, had no substantive substantial adverse interest in the corpus or income of the trust created on February 1, 1932; and further that since petitioner could revoke the trust at any time in conjunction with Ridgely, the transfer in trust was not a completed gift for tax purposes as to any of the beneficial interests specified therein, as contended by respondent. Cf. Marguerite F. Schwarzenbach, 4 T.C. 179.
Upon the execution of the trust amendment on December 11, 1937, the petitioner's wife became the only person in conjunction with whom he could thereafter exercise his reserved power of revocation or modification of the trust and as the present income beneficiary she had a substantial adverse interest in the entire trust property, so that by such amendment petitioner abandoned his dominion and control over the trust property. Accordingly, we further conclude that for gift tax purposes petitioner, made a completed gift of the entire trust property on December 11, 1937, as affirmatively alleged by respondent. Cf. Estate of Ethel K. Childers, 10 T.C. 566. It follows that respondent erred in his determination as set forth in the deficiency notice from which this proceeding was initiated and the amounts of increased deficiencies claimed by respondent will be determined under Rule 50.
In view of the foregoing conclusions and with respect to the applicable corollary issues raised by the parties, we hold: That the fair market value of the completed gift of property in trust on December 11, 1937, was $518,089.76; that the amount of $17,828.34 income of the trust paid to Alida during 1937 prior to December 11 constituted a gift to her by petitioner in that year; that in computing the gift tax liability for 1937 petitioner is entitled to an unused portion of the $40,000 specific exemption in the amount of $7,057.21; and that in determining the amount of net gifts for years preceding the taxable years 1937 and 1943, the amounts shown in our findings as the net income of the trust paid to Alida during the years from June 6, 1932, to December 11, 1937, inclusive, constituted annual gifts by petitioner in those years.
Decision will be entered under Rule 50.