Commissioner of Internal Revenue v. Procter, 5215.
| Decision Date | 31 May 1944 |
| Docket Number | No. 5215.,5215. |
| Citation | 142 F.2d 824 |
| Parties | COMMISSIONER OF INTERNAL REVENUE v. PROCTER. |
| Court | U.S. Court of Appeals — Fourth Circuit |
Carlton Fox, Sp. Asst. to the Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen, and Sewall Key and J. Louis Monarch, Sp. Assts. to the Atty. Gen., on the brief), for petitioner.
Thomas H. Fisher, of Chicago, Ill., for respondent.
Before PARKER, SOPER, and DOBIE, Circuit Judges.
This is a petition to review a decision of the Tax Court holding that no gift tax could be assessed upon a transfer by one Frederic W. Procter of the remainder interests in two trust estates, which had been assigned by him as security to certain promissory notes. The facts are not disputed and are as follows:
Taxpayer held interests in four separate trusts which had been created by his grandfather. On January 13, 1939, he was indebted to his mother in the sum of $686,300.03, evidenced by seven promissory notes payable on demand, which had been secured by the assignment of his interest in all four of the trusts, and which expressly provided that his interest in the trust property might be sold and the proceeds thereof applied in payment of the notes if he should fail to pay them on demand. On that date, he entered into an agreement with his mother, by which it was provided that further interest on the notes was waived, that his interest in two of the trusts was released from the lien of the assignment and that the holders of the notes should have recourse, by virtue of the lien of the assignment or by execution on any judgment obtained on the notes, only against the two remaining trusts, in which he held remainder interests in property subject to the life estate of his mother. At the same time, he executed a trust indenture assigning to trustees his interest in these two remaining trusts, providing that upon the death of his mother the trustees should pay therefrom the amount due on the notes if any of them should then remain unpaid, should pay to him during his lifetime the income from what should remain of the corpora of the trusts and should deliver to his children, or their representatives, at his death the corpora remaining in their hands at that time. It is this gift to the children of the taxpayer which is said to be subject to the gift tax.
While the interest on the notes was waived after January 13, 1939, there was no provision extending the time for payment after that date; and it appears that on June 1, 1942, the taxpayer's mother demanded payment of the notes and that taxpayer instituted suit against her in the Southern District of New York alleging that they were void and asking that she be enjoined from transferring them. The Tax Court found specifically that there was no agreement to postpone demand and collection of the notes, and, while it made no express finding as to their validity, it treated them in its decision as valid.
One of the trusts here involved was created by the grandfather of taxpayer in a trust indenture executed in the year 1914; the other was created by his grandfather's will. On January 13, 1939, the value of the corpus of the first was $928,593.70, that of the second was $961,552.68. Taxpayer was 36 years of age at that time and his mother 63. In both trusts he had a vested remainder after the life estate of his mother, subject to be divested, however, if he died before her. In the second trust, the remainder was subject to the additional condition that he should have attained the age of 40 years at his mother's death.
It was stipulated that the present worth of $1 due at the death of a person aged 36, provided that a person aged 63 shall have died before the person aged 36, is $0.25152, and that its present worth, upon the additional condition that the death of the person aged 36 occur after four years is $0.24883. There was no stipulation or finding, however, as to the present worth of $1 due at the death of a person age 63 years, provided a person aged 36 years should survive.
The Commissioner computed the gift tax by subtracting the amount of the debt from the corpus of the first trust, and finding the present worth of the remaining portion and the entire corpus of the second trust based upon the above formulae as to the present worth of $1 payable at the death of a person 36 years of age etc., i. e. $0.25152 and $0.24883. The Tax Court, before subtracting the amount of the debt, found the present worth of the corpora of both trusts by the application of the same formulae, which were appropriate only for finding the present worth of property available at the death of taxpayer and were not appropriate when the property was available at the death of his mother. As the value of the present interest in the corpora of the trusts thus calculated was less than the amount of the debt secured by the assignment of taxpayer's interest in the trusts, the court held that the gift had no value and was therefore not subject to tax.
The question which confronts us at the outset is how property which has been pledged or assigned as security for a debt and is afterwards made the subject of gift should be valued for the purposes of the gift tax (i. e. whether the debt should be deducted from the value of the property or not); but the Tax Court has decided that the value for purposes of gift taxation is the excess of the value of the property pledged or assigned over the debt. Jackman v. Commissioner, 44 B.T. A. 704. The rule is not one of law, but one for arriving at a conclusion of fact, the value of the property given; and, in view of the fact that there is nothing here to show that the debt could have been paid otherwise than out of the trust property, we cannot say that the Tax Court was guilty of error of law in following it in this case. Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239.
Since there was no agreement to postpone collection of the notes until after the death of taxpayer's mother, there was no basis upon which the action of the Commissioner in deducting the amount of the debts from the corpora of the trusts and finding the present value of what remains can be sustained. If there had been such agreement, the position of the Commissioner would have been correct; for the debt chargeable against the corpora of the trusts would not have been payable until the trust property should have become available to taxpayer for payment thereof; and, in that event, it would have been the difference between the two that would have been the subject of the gift to take effect at taxpayer's death. As the collection of the debt was not postponed, however, the amount thereof must be deducted, not from the future value, but from the present value of the property pledged as security; for it is only by such deduction that the value of the property given at the time of the gift can be ascertained. The present value of the taxpayer's interest in the property, however, should have been ascertained, not with reference to his death, but with reference to his mother's death, for it was then that he became entitled to the property. We are told that the present worth of $1 at the death of his mother was $0.56445, or $0.55377 when the additional condition is present that he attain the age of forty years.
The Tax Court was in error in holding that the present value of the corpora of the trusts should have been ascertained with reference to the death of taxpayer rather than with reference to the death of his mother. It held in effect that the value of the gift must be calculated upon the hypothesis that the taxpayer's interest in the property would not become available for the payment of the notes until his death. There is no evidence of any sort to support any such hypothesis. The evidence is...
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