Blumberg v. Smith, 8113.

• Decision Date: 18 November 1943
• Docket Number: No. 8113.,8113.
• Citation: 138 F.2d 956
• Parties: BLUMBERG v. SMITH.
• Court: U.S. Court of Appeals — Seventh Circuit

138 F.2d 956 (1943)

BLUMBERG v. SMITH.

No. 8113.

Circuit Court of Appeals, Seventh Circuit.

November 18, 1943.

Samuel O. Clark, Jr., Sewall Key, and Ray A. Brown, Asst. Attys. Gen., and Samuel H. Levy and Arthur Manella, Sp. Assts. to Atty. Gen. (B. Howard Caughran, U. S. Atty., of Indianapolis, Ind., of counsel), for appellant.

Samuel D. Royse, Gilbert W. Gambill, and Cooper, Royse, Gambill & Crawford, all of Terre Haute, Ind., for appellee.

Before EVANS and KERNER, Circuit Judges, and LINDLEY, District Judge.

Involved here is an asserted gift tax liability which the taxpayer disputed because of a previous tax payment when the gifts were made. The District Court held for the taxpayer.

EVANS, Circuit Judge.

While the action took the form of one to recover taxes paid, the legal controversy was over the query, When were two gifts made by the taxpayer completed, for gift tax purposes (under Sec. 501 of Revenue Act of 1932 as amended by Sec. 511 of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Acts, pages 580, 769)?

The two gifts were made by the taxpayer in the form of two trusts, the beneficiaries being the cousins or children of the cousins of the settlor. One was called the Ravitch Trust. The other was the Lavrova Trust. The material facts in reference to the dates and amounts of said trusts are herewith set forth:

                                                                   Ravitch Trust            Lavrova Trust
                  ------------------------------------------------------------------------------------------
                  Created                                           Jan. 2, 1936            Jan. 1, 1937
                  Value at time of creation                          $79,184.17              $27,313.24
                  Gift tax paid, Nov. 1938                    $1,151.05 and interest  $1,683.72 and interest
                  Date of surrender of power to
                    change beneficiary                             Dec. 11, 1939            Dec. 11, 1939
                  Value of trust on Dec. 11, 1939                   $120,964.83              $41,223.84
                  Gift tax paid March 14, 1940, on
                    both trusts here sought to be recovered
                    $12,384.06
                

The taxpayer in each trust reserved the right to divert the income at any time from the beneficiaries and also to end the trust. In view of its importance, we quote the language from each of the trusts:

The Ravitch Trust.

"11. Notwithstanding any other provision contained in this instrument, said Trustee shall have the right in his discretion at any time to pay to Fannie Blumberg, or if she be dead, to the heirs of said Fannie Blumberg, in accordance with the laws of descent of the State of Indiana, said trust fund and all additions and accretions thereto, to have and to hold absolutely and in fee simple, free of all trust, and thereupon this trust shall cease and determine."

The Lavrova Trust.

"11. Notwithstanding any other provisions contained in this instrument, said Trustee shall have the right in his discretion at any time to pay to the living children of said Benjamin Blumberg, or the issue of any deceased child, and/or to his wife, Fannie Blumberg, or to any of them, all or any part of said trust fund and all additions and accretions thereto, to have and to hold absolutely and in fee simple free of all trust, and whenever all of said trust estate and all additions and accretions thereto shall have been paid and distributed, then this trust shall cease and determine."

In each of the two trusts the settlor, by other provisions, as sole trustee, was also given the right "in his sole discretion," either to accumulate the income for a certain period or to pay it to any one or all of several designated beneficiaries.

On December 11, 1939, the settlor, who was the sole trustee, relinquished the power to change a beneficiary by resigning as the trustee.

In November, 1938, taxpayer paid a gift tax which on the Ravitch Trust was $1,151.05 and interest. On the Lavrova Trust the tax paid was $1,683.72 and interest.

After the decisions of the Supreme Court in Sanford's Estate v. Commissioner, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20, and Rasquin v. Humphreys, 308 U.S. 54, 60 S. Ct. 60, 84 L.Ed. 77, decided the same day, wherein it was held that a gift in trust is not subject to a gift tax until it becomes absolute, that is, until the power to change the beneficiaries therein has been surrendered by the settlor, the taxpayer evidently believed, or was advised, that his gift was not subject to a gift tax when executed and did not become subject to a tax until after he resigned.

This, we think, is apparent from the fact that on March 14, 1940, he paid a gift tax of $12,384.06 on the assumption that the gift tax attached when he resigned as trustee. The difference in the two amounts of gift taxes was due to the increase in the value of the trusts between the date of execution of the trusts and the date when settlor resigned as trustee...