Cerf v. Comm'r of Internal Revenue, Docket No. 108434.

• Decision Date: 11 May 1943
• Docket Number: Docket No. 108434.
• Citation: 1 T.C. 1087
• Parties: CAMELIA I. H. CERF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

1 T.C. 1087

CAMELIA I. H. CERF, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 108434.

Tax Court of the United States.

Promulgated May 11, 1943.

Petitioner had the right to receive during her life all of the income of four trusts which her husband created in 1928 for the benefit of her and their four children. The settlor assigned to the trusts one-half of the renewal commissions which were to become payable to him under a general agency contract with a life insurance company. The trusts could not be amended or revoked without petitioner's consent. In 1932 the trusts were amended, with petitioner's consent, so as to give the settlor the right to the income for life and the right further to amend or revoke the trusts at his pleasure. Held, that petitioner made a gift to the settlor in 1932 of her life interest in the trusts; held, further, that in his valuation of petitioner's life interest the respondent properly took into account the annual increases in the trust corpora which would result from the receipt in the future of one-half of the renewal commissions under the insurance agency contract. Ewing Everett, Esq., and Malcolm Johnson, Esq., for the petitioner.

Robert S. Garnett, Esq., for the respondent.

OPINION.

SMITH, Judge:

This proceeding involves a gift tax deficiency of $4,377.80 for 1932. The respondent has determined that petitioner made gifts to her husband of the income for her life, or the right to receive the income for life, of four trusts which her husband had created for the benefit of her and their four children. The facts are stipulated.

Petitioner is a resident of the State of New Jersey and is the wife of Louis A. Cerf, who is also a resident of that state. She filed her gift tax return for 1932 with the collector of internal revenue for the fifth district of New Jersey.

From 1910 to 1927 Louis A. Cerf acted as general agent for the Mutual Benefit Life Insurance Co. of Newark, New Jersey, under an agency contract which entitled him to certain renewal commissions on policies of insurance written for the company by him or his agents in Greater New York and vicinity. In 1927 he gave the required notice to the company of termination of the contract and his resignations as general agent. All renewal commissions which became due him after the effective date of his resignation were paid to him by the company up to November 15, 1928. Thereafter, pursuant to his instructions to the company, one-half of the renewal commissions as they became due were paid to the four trusts referred to above.

The four trusts were created by Louis A. Cerf (hereinafter referred to as the donor) on October 1, 1928, each for the benefit of petitioner and one of their four children. To each trust the donor transferred a one-eighth portion of the renewal commissions to become due and payable to him under his agency contract with the insurance company. The commissions were to constitute the corpora of the trusts and the net income of the trusts was to be paid to petitioner for life if she should accept it, otherwise it was to be added to corpus. Petitioner was given a general power of appointment to be exercised by will over the income of the trusts during the life of the donor. In the absence of such appointment the income was to be added to corpus. After the death of petitioner and the donor the income was to be paid to the child named as beneficiary for such child's life. Upon the death of the child the corpus was to be distributed in accordance with the provisions of the will of such child, or, in the default of such appointment, to the heirs at law of such child. The trust agreement creating the trust for petitioner and her daughter, Katherine Sophia Cerf, which, it is stipulated, is representative of the other three trusts, reads in part as follows:

1. The Donor hereby assigns to the Trustees a one-eighth interest in the commissions hereafter accruing with respect to renewal premiums under contracts of the Donor with the Mutual Benefit Life Insurance Company of Newark, New Jersey being considered as principal or capital and not as income), to invest and reinvest the same, to hold and manage such investments and reinvestments, to collect and receive the income therefrom and to pay the net income to Camelia I. H. Cerf during the term of her natural life if she shall accept it, (the right to so accept such income or any part thereof to continue in Camelia I. H. Cerf during the term of her natural life, notwithstanding one or more refusals thereof) or if she shall not have accepted such income or any part thereof at the time of her decease to add it at that time to the corpus of the trust; and thereafter (the Donor and his wife having died) to pay the net income to Katherine Sophia Cerf during the term of her natural life; and upon the death of the survivor of the Donor, his wife, and their said daughter, to transfer, pay over and distribute the principal or capital of the fund then held in trust by the surviving trustee hereunder to and among such person or persons (including corporations) and in such amounts and shares as said daughter shall by her last will and testament, duly probated, direct or appoint, or in default of such direction or appointment, to and among those persons who would have been entitled to receive the same, and in the amounts and shares to which they would have been so entitled if the said daughter had then died intestate, a resident of New Jersey, seized and possessed of said fund in her own right.

The donor, the petitioner, and the Savings Investment & Trust Co. were named trustees of each of the trusts. Each trust was to continue for the life of the survivor of the donor, the petitioner, and the child named as beneficiary. There was reserved to the donor the right to amend or revoke the trusts only with the written consent of the petitioner and ‘in conjunction with said beneficiary (the petitioner).‘ Each of the trust agreements was signed by the donor, the petitioner, and the Savings Investment & Trust Co., as trustees.

On June 30, 1932, with the written consent of the petitioner, the donor executed amendments to all four of the trusts which provided that upon written demand of the donor during his lifetime the trustees would pay to him or his nominees or assigns (1) ‘the sum of $7,800.00 out of the monies now in the hands of said Trustees, derived from the sale of government securities‘; (2) ‘the sum of $1,700.00 from the monies now due and payable under the terms of said trust to said Camelia I. H. Cerf‘; (3) ‘all commissions mentioned in paragraph 1 of said Deed of Trust dated October 1, 1928 hereafter paid to said Trustees‘; and (4) ‘all net income of whatever nature or from whatever source hereafter derived.‘

On August 23, 1932, the donor, with the written consent of petitioner, made further amendments to each of the trusts which gave him the right to amend or revoke any or all of them at his pleasure and without petitioner's consent.

On August 19, 1935, the donor made all of the above described trusts irrevocable and gave up all of his rights in the trust corpus and income.

Over the period June 30, 1932, to August 19, 1935, the donor from time to time demanded and received all of the income of all of the trusts. The net income of the trusts from investments for the period June 30, 1932, to December 31, 1932, amounted to $5,918.59. In addition to this income the trustees received $28,958.29 of renewal commissions during that period, which were treated as principal.

The petitioner filed a gift tax return for 1932 in which she reported total gifts, other than charitable, of $42,079.51. These gifts included a gift to the donor, Louis A. Cerf, made effective by the trust amendments of June 30, 1932, of the income of the four trusts for his life at a valuation of $26,601.56 and gifts to each of the four children of the income of the trust of which each child was a beneficiary for a period measured by the excess of petitioner's life expectancy over the life expectancy of the donor, valued in the aggregate at $15,477.95. Petitioner stated in her return that she reserved the right to question the obligation to file the return and to contest her liability for any gift tax.

The respondent determined in his deficiency notice that petitioner made two separate gifts to the donor in 1932, one on June 30, 1932, consisting of the income of the trusts for his life, which he valued at $105,714.06, and one on August 23, 1932, consisting of the income of the trusts for the period represented by the excess of the life expectancy of petitioner over that of the donor, which he valued at $60,867.78. He allowed the petitioner only one exclusion of $5,000.

In his valuation of the gift of June 30, 1932, the respondent determined that the mortgage certificates, stocks, real estate, and cash held by the trustees on that date had a value of $191,498.57 and that the one-half interest in the Mutual Benefit Life Insurance Co. contract which the trusts jointly owned had a present worth of $208,145.77. Discounting the aggregate of those amounts $399,644.34 at 4 percent, and using an annuity or life expectancy factor of 6.61301 (the donor was then 69 years of age), he determined a total present value of $105,714.06 for the gift. The value of the August 23 gift was determined in a similar manner except that an annuity factor of 3.74630 was used, representing the excess of petitioner's life expectancy (petitioner was then 57 years of age), over that of the donor.

It is stipulated in this proceeding that ‘the value as of June 30, 1932 and August 23, 1932, attributed to the mortgage certificates, stocks, real estate, cash and the one-half interest in the commissions accruing after June 30, 1932, with respect to the renewal premiums under contract of Mr. Cerf with the Mutual Benefit Life Insurance Company as set forth in the statement attached to the deficiency notice is...