Sherman v. Commissioner , 41 B.T.A. 898 ( 1940 )

DORIS BOND SHERMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Sherman v. Commissioner

Docket No. 95300.

United States Board of Tax Appeals

41 B.T.A. 898; 1940 BTA LEXIS 1123;

April 23, 1940, Promulgated

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Petitioner in 1935 and 1936 gave certain property to a trust which she had created in the former year. The beneficiaries of the trust were petitioner and her four living children. By the trust instrument petitioner reserved the right to limit or divest the rights of any and all beneficiaries to the extent of adding to the beneficiaries other children, if any, of petitioner. Held, gifts were not complete and not subject to Federal gift taxes in 1935 and 1936. Estate of Sanford v. Commissioner,308 U.S. 39">308 U.S. 39.

Dana Latham, Esq., for the petitioner.

Samuel Taylor, Esq., for the respondent.

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KERN

This proceeding involves deficiencies in petitioner's Federal gift tax liability determined by the respondent for the calendar years 1935 and 1936 in the amounts of $450 and $2,788.02, respectively, arising by reason of respondent's disallowance of certain $5,000 exclusions claimed by petitioner. At the time of the hearing herein petitioner filed an amended petition contending that petitioner made no taxable transfers by way of gift during the taxable years and asking that this Board determine overpayments of tax by petitioner in the sum of $1,350 for the year 1935 and $6,142.39 for the year 1936.

FINDINGS OF FACT.

The facts herein have been stipulated by the parties. We adopt such stipulation as our findings and merely set out briefly an outline of the facts in order to show how the issues involved herein arise.

Petitioner is an individual who was born July 20, 1897. On or about December 31, 1935, petitioner created a certain trust. During that year she transferred to the trust property of the then market value of $323,226.82, and in 1936 transferred additional property thereto of the then market value of $120,810.50. A copy of the trust indenture is attached to the stipulation of facts as Exhibit A.

Under the terms of the trust indenture the trustee is to pay the entire income from the trust to the petitioner during her life or until the death of her father. On the death of petitioner's father, if petitioner be then living, five-ninths of the income of the trust is to be paid to petitioner during the remainder of her life, and one-ninth of the income to each of her four named daughters, if living, the four daughters to receive the entire income, share and share alike, following the death of petitioner until they each become forty years of age, when they are to receive their respective shares of the corpus. The indenture also contains provisions for the distribution of any deceased daughter's share to her issue and, in default of issue, that daughter's share is to go to the surviving daughters or their issue.

Under paragraph VII of the declaration of trust it is provided that the trust is irrevocable, but the trustor, the petitioner herein, reserved the right, with the consent of the trustee, to "amend this trust, amend or cancel any amendments, and limit or divest the rights of any or all beneficiaries to the extent only of adding to and detracting from the powers of the trustee and of adding to the beneficiaries hereof other children, if any, of the trustor."

In the Federal gift tax returns filed by petitioner for the calendar years 1935 and 1936, petitioner, in determining her gift tax liability for those years, deducted four exclusions of $5,000 each, or a total of $20,000, pursuant to section 504(b) of the Revenue Act of 1932. Upon audit of said gift tax returns respondent determined that petitioner was not entitled to any $5,000 exclusions in computing her gift tax liability for those years, and determined deficiencies of $1,800 and $2,788.02 for the respective years. Petitioner paid the alleged additional tax for the year 1935 in the amount of $1,800 and filed a claim for refund therefor. This claim was allowed only to the extent of $468.37, as a result of allowing petitioner one $5,000 exclusion. Said sum was refunded. Thereafter respondent determined that the refund was erroneous and determined a deficiency of $450 for the calendar year 1935, arising out of a disallowance of any $5,000 exclusion.

Subsequently, under the belief that the transfers to the trust in 1935 and 1936 did not amount to taxable gifts, petitioner filed a claim for refund of $1,350 of the 1935 tax - being that portion of the tax paid in compliance with the notice of deficiency and not refunded - and a similar claim for the entire tax paid for 1936, being $6,142.39. These claims were disallowed.

We find that petitioner has made an overpayment of tax in respect of the taxable years and that the tax was not paid more than three years before the filing of the claims for refund.

OPINION.

KERN: The first question to be decided by us in the instant proceeding is whether petitioner made taxable gifts in the year 1935 and 1936. This question must be examined in the light of the opinion of the Supreme Court in . In that case it was held that a transfer of property upon trust, with power reserved in the donor to modify the trust so as to designate new beneficiaries other than himself, is incomplete and, therefore, not taxable as a gift. In this proceeding there were transfers of property upon trust and the trust instrument, by section VII thereof, provided in part as follows: "The trustor may * * * amend this trust * * * and limit or divest the rights of any or all beneficiaries to the extent only of * * * adding to the beneficiaries hereof other children, if any, of the trustor."

Here, then, as in the Sanford case, the donor had the power to modify the trust so as to designate new beneficiaries. However, the power here is to designate new beneficiaries from a limited class (other children of the trustor) and during the taxable years no members of that class were in being. It should be noted that there is nothing in the record to indicate the impossibility of the birth of other children to the trustor.

There being reserved to the trustor the power to designate new beneficiaries, does the fact that the exercise of this power is a mere possibility distinguish this case from the Sanford case? We do not think so. As long as the trustor has such a power and the exercise of it is a possibility, the gifts in trust can not be considered as complete, in the light of the reasoning of the opinion of the Supreme Court in that case. Its decision is not based on the probability of the exercise of the power and no distinction is made between a present possibility and a remote or contingent possibility. Cf. .

Since the gifts made by petitioner were not complete within the taxable years, they were not subject to the Federal gift tax, and it follows that there are no deficiencies, but, on the other hand, overpayments of gift taxes by the petitioner for the taxable years.

Holding as we have on this first question, it is unnecessary to consider the other issues raised.

Reviewed by the Board.

Decision will be entered pursuant to Rule 50.