Pleet v. Comm'r of Internal Revenue

• Citation: 17 T.C. 77
• Decision Date: 27 July 1951
• Docket Number: Docket No. 22911.
• Parties: GILBERT PLEET, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

17 T.C. 77

GILBERT PLEET, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 22911.

Tax Court of the United States.

Promulgated July 27, 1951.

1. GIFT TAX— PREMIUMS ON POLICIES HELD IN TRUST.— Petitioner paid premiums on insurance on the life of his father who transferred the policies in trust. Held, that petitioner's interest in the trust was such that the payment was for his own financial benefit and was not a gift. Grace R. Seligmann, 9 T.C. 191, followed.

2. ID.— TRANSFER IN TRUST— COMPLETED GIFT.— In 1934 petitioner and his brother transferred insurance policies, on the life of their father, in trust with reservation of the right to exercise all privileges under the policies and to revoke the trust by their joint action or by the survivor of them at any time prior to the death of the insured. Further, upon lapse of any of the policies the settlors were to receive their share of the proceeds free of the trust. The insured died in 1937 and thereupon the reservations ceased. Held, that the interests of the settlors in the trust property were mutual and reciprocal so that neither had a substantial adverse interest and that the transfer constituted a completed gift in 1937 for gift tax purposes. Edward N. Polisher, Esq., for the petitioner.

William H. Best, Jr., Esq., for the respondent.

OPINION

TIETJENS, Judge:

Respondent determined a deficiency of $7,737.73 in petitioner's gift tax for the calendar year 1945 from which determination petitioner appeals.

The petitioner assigns error in respondent's disallowance of a claimed specific exemption of $30,000 for the year 1945 and determination of net gifts in the amount of $50,732.18 for preceding years in ascertaining the total net gifts for the purpose of computing 1945 gift tax liability. In connection therewith and more particularly, petitioner assigns error in respondent's determination (1) that the payment by petitioner of insurance premiums during 1935 on policies on the life of his father, which policies were held in a trust created by the father for the benefit of certain persons including petitioner, constituted a gift for gift tax purposes and, in the alternative, if the payment was a gift, that petitioner was not entitled to $5,000 exclusion from such gift; and (2) that a transfer in trust under a 1934 agreement by petitioner and his brother, of insurance policies taken out by them on the life of their father, constituted a completed gift upon the death of the insured in 1937, instead of upon the transfer in trust in 1934.

At the hearing petitioner conceded that in computing gift tax liability for 1945, he is not entitled to an allowance in that year of any portion of the $30,000 specific exemption theretofore claimed and allowed in determining net gifts for preceding years. Also at the hearing, petitioner conceded the correctness of respondent's adjustment of the value of the gift for 1937, if it be determined herein that the transfer in trust was a completed gift in that year.

This cause was submitted on a stipulation and exhibits which are adopted as our findings of fact.

The petitioner, a resident of Philadelphia, Pennsylvania, filed a gift tax return for each of the years 1935, 1937, and 1945 with the collector of internal revenue for the first district of Pennsylvania. The 1935 return reported a gift of the value of $5,512.92 as the amount of premiums paid on life insurance policies held in trust; an exclusion of $5,000; net gifts of $512.92 for that year; and no net gifts for preceding years. The 1937 return, made under protest, reported a gift of the value of $71,536.75 as the actuarial value upon the father's death in 1937 of life insurance policies transferred in trust in 1934; and exclusion of $5,000; a specific exemption of $40,000; net gifts of $26,536.75 for that year; and no net gifts for preceding years. The 1945 return reported a gift of property to petitioner's wife of the value of $42,500; an exclusion of $3,000; a specific exemption of $30,000; net gifts of $9,500 for that year; and no net gifts for preceding years.

In asserting the deficiency in controversy the respondent determined that petitioner's net gifts for preceding years amounted to $50,732.18 and his total net gifts amounted to $90,232.18 for the purpose of computing the 1945 gift tax liability. For the year 1935 respondent determined a net gift of $5,512.92 after disallowing the claimed exclusion of $5,000 on the ground that the gift was one of a future interest. For the year 1937 respondent increased the 1937 actuarial value of the insurance policies transferred in trust from the reported $71,536.75 to the amount of $80,219.29; allowed the claimed $5,000 exclusion and $40,000 specific exemption; and determined a net gift of $35,219.26. In computing net gifts for preceding years respondent included the sums of $5,512.92 for 1935 and $35,219.26 for 1937 and in addition thereto the sum of $10,000 representing the amount by which the specific exemption of $40,000 previously claimed and allowed exceeded the $30,000 specific exemption provided for by section 1004(a)(1), Internal Revenue Code as amended by section 455 of the Revenue Act of 1942,¹ thus computing the above-mentioned amount of $50,732.18 as net gifts for preceding years. For the year 1945 respondent after disallowing the claimed specific exemption of $30,000, determined a net gift of $39,500 for that year and total net gifts in the above-mentioned amount of $90,232.18 on which he computed the asserted gift tax liability for 1945.

The two issues raised by the more particular assignments of error, set forth at the outset of this opinion, will be discussed separately.

Issue No. 1.

On April 17, 1934, Abraham Pleet, petitioner's father, executed a trust agreement with the Fidelity-Philadelphia Trust Company as trustee and transferred by assignment to the trustee ten policies of life insurance, upon his own life, having a total cash surrender or loan value of $92,239.91 at that time and a total value of $315,000 at maturity. Those policies earned annual dividends of $3,594.67 and $3,208.40 during the years 1934 and 1935, respectively.

The trust, by its terms, was irrevocable except that if both of the settlor's sons, Herbert and Gilbert, predecease him the settlor shall have the right to alter, revoke, or change all or any trusts therein declared. Further, the trust instrument provided, inter alia, that upon maturity of any and all of the life insurance policies by death of the settlor or prior thereto, the trustee shall collect the proceeds thereof and hold the same in trust for the specified purposes; that the sum of $500 be paid to the settlor's chauffeur and each of the daughters of Louis Pleet if living at settlor's death; that two separate sums of $35,000 be set aside by the trustee and the income therefrom be paid to the settlor's two sisters during their respective lives and thereafter such sum to become a part of the principal of the trust; that the balance of the principal of the trust be held, invested, and reinvested, and the income therefrom be paid to the settlor's wife, Lena Pleet, during her life; that upon the death of the survivor of settlor and his wife ‘to pay the said net income equally unto Settlor's sons, Herbert Pleet and Gilbert Pleet, for and during the terms of their respective lives‘ and upon the death of each son, whether before or after the death of the survivor of settlor and his wife, to pay over at any time fixed for distribution thereof the principal of the trust represented by the deceased son's share had he been living, to his children and the issue of his children living at the time of distribution, per stirpes, and in default of such issue to pay over such son's share to the survivor of settlor's sons, absolutely, and in default of either son or his issue living at time of distribution to distribute the then principal of the trust as provided by the laws of Pennsylvania had settlor then died possessed thereof in fee; that the trustee assumed no liability for the payment of premiums or other charges which may become due upon the policies; that upon death of settlor his sons, Herbert and Gilbert, shall become co-trustees with the same powers, discretions and duties as the corporate trustee; and further, as follows:

FOURTH: Any and all dividends due from time to time upon any and all policies of insurance held hereunder shall be payable to Trustee and the receipt of Trustee for such dividends shall be a full and complete discharge therefor to the insurance companies issuing the policies upon which the respective dividends are so paid. Any and all dividends so received by Trustee shall be paid over by Trustee to Herbert Pleet, sone of Settlor, or upon directions from him, in writing, shall be applied by Trustee in reduction of premiums payable on the said policies of insurance.

In the event of the death, resignation or inability, for any reason, to act of the said Herbert Pleet, the said dividends shall be paid over by Trustee to Gilbert Pleet, son of Settlor, and the rights and privileges hereinabove given to the said Herbert Pleet shall be exercised by the said Gilbert Pleet. The decision of the Trustee in determining the inability of the said Herbert Pleet to act shall be final and for the exercising of this discretion in determining such inability Trustee is hereby absolved from any and all liability.

During such time as Settlor's sons, Herbert Pleet and Gilbert Pleet shall both be living Trustee shall at any time and from time to time, upon receipt of written directions signed by both of them, borrow such amount or amounts as Settlor's said sons may agree upon on such insurance policy or policies held hereunder as Settlor's said sons shall agree upon, the amount or amounts so received by Trustee to be paid over equally and absolutely to Settlor's said sons.

After the death of either of Settlor's said sons, Trustee shall at any time and...