Fletcher Trust Co. v. COMMISSIONER OF INT. REVENUE

• Decision Date: 23 March 1944
• Docket Number: No. 8380.,8380.
• Citation: 141 F.2d 36
• Parties: FLETCHER TRUST CO. v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Seventh Circuit

141 F.2d 36 (1944)

FLETCHER TRUST CO. v. COMMISSIONER OF INTERNAL REVENUE.

No. 8380.

Circuit Court of Appeals, Seventh Circuit.

February 17, 1944.

Rehearing Denied March 23, 1944.

Joseph J. Daniels and Paul N. Rowe, both of Indianapolis, Ind. (Baker, Daniels, Wallace & Seagle, of Indianapolis, Ind., of counsel), for petitioner.

Samuel O. Clark, Jr., Sewall Key, Gerald L. Wallace, Helen R. Carloss, and Helen Goodner, Dept. of Justice, all of Washington, D. C., and J. P. Wenchel and Ralph F. Staubly, Bureau of Internal Revenue, both of Washington, D. C., for respondent.

Before MAJOR, KERNER, and MINTON, Circuit Judges.

MAJOR, Circuit Judge.

This is a petition to review a decision of the Tax Court, entered May 7, 1943, sustaining respondent's assessment of a federal gift tax liability for the year 1936. The assessment was against petitioner as trustee, and the decision of the Tax Court was predicated on the theory that petitioner was liable as fiduciary for a transferee. There is no factual dispute as the findings of the Tax Court follow in the main a stipulation of the parties. A brief statement of such facts will suffice to reveal the legal questions raised by petitioner.

Hugh McK. Landon, a resident of Indianapolis, Indiana, as donor, and petitioner, a corporation also of Indianapolis, Indiana, as trustee, on May 23, 1932 entered into and executed a written trust agreement whereby Landon irrevocably assigned, transferred and set over unto the trustee certain policies of insurance theretofore issued on his life. Among other provisions, the trust agreement provided that the donor reserve to himself the right to change any of the beneficiaries named therein or the terms under which any beneficiary might take, except that the donor could not himself become a beneficiary. The trust agreement was amended on three occasions, but only the last amendment has any pertinency. By this amendment dated July 18, 1936, the donor irrevocably cancelled and surrendered his right to change any of the beneficiaries or any of the terms under which any beneficiary was to take.

On March 15, 1937, Landon filed with the Collector of Internal Revenue at Indianapolis a gift tax return for 1936, in which he recited the facts concerning the trust instrument of May 23, 1932, as well as the terms of the amendment of July 18, 1936, but reported no taxable gift during the year. On June 4 and June 7, 1937, Landon also filed with the Collector of Internal Revenue statements from the life insurance companies which had issued the trusteed policies of life insurance, disclosing the gift tax values of said policies as of July 18, 1936, the date on which he cancelled and surrendered his right to change the beneficiaries or terms of the trust agreement. The values so shown for the four policies were $18,885.30, $18,034.66, $42,061.62, and $20,727.48. The premiums on such policies due for the years 1936 and 1937 were paid by Landon.

On June 4, 1937, the petitioner filed with the Collector of Internal Revenue for the district of Indiana a "Donee's or Trustee's Information Return of Gifts" for the year 1936, disclosing information similar to that appearing on the gift tax return previously filed by Landon. No gift tax was paid by either the donor or petitioner in respect to 1936 gifts by Landon.

There appears no necessity for relating in detail the terms of the trust agreement. It is sufficient to state that petitioner was required to hold the policies of insurance until their maturity and upon the donor's death to divide the proceeds thereof into three separate trust funds for the benefit of the donor's son-in-law and two daughters, each of whom was given the life income from his or her respective share in the trust fund. Provision was also made for disposition of the remainder interest.

The Commissioner at no time mailed a deficiency notice to the donor. Such notice, however, was mailed to petitioner (trustee) on January 18, 1941, and was received by it three days later.

The contested issues are (1) did Landon's surrender in 1936 of the reserve power to change beneficiaries without making himself a beneficiary constitute a taxable gift in that year? and (2) if the first issue be decided in the affirmative, is petitioner liable for the tax upon such gift?

The gist of petitioner's contention on the first issue is that it had a right to rely upon regulations promulgated by the Treasury Department as to when the gift became complete, so as to create a tax liability. Amended Article 3 of Regulation 79, promulgated February 26, 1936 and in effect when the donor cancelled and surrendered his right to change beneficiaries, is particularly relied upon. It is earnestly insisted that by reason of this amended regulation, as well as prior regulations relative to the same subject matter, that the donor's cancellation and surrender of his right to change beneficiaries did not complete a taxable gift. We think there is no occasion to set forth such regulations with a view of determining the validity of petitioner's argument in this respect. This is so for the reason that even though we assume that petitioner was misled, it does not follow as a legal consequence that it can for this reason escape tax liability. The Tax Court, in deciding this issue contrary to petitioner, regarded Higgins v. Commissioner, 1 Cir., 129 F.2d 237, as controlling. The court in the Higgins case, in a well reasoned opinion, held that the 1936 Treasury regulation there relied upon by the taxpayer, as here, was inconsistent with the gift statute and therefore invalid. Any inclination which we might have to disagree with the decision in that case has been definitely eliminated by 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. According to these cases, there can be no doubt but that the donor's gift in the instant case became complete and subject to a tax at the time the donor relinquished his right to change the beneficiaries.

We do not understand that petitioner controverts the effect of these decisions, but nevertheless it argues that its good faith reliance upon the regulations should preclude the imposition of the tax. A similar argument was made to this court in the recent case of Blumberg v. Smith, 7 Cir., 138 F.2d 956, and decided adversely to the taxpayer's contention. In doing so, this court (138 F.2d at page 958) said:

"In our opinion, however, these regulations would not control, even though they covered the facts in this case. For regulations can not modify or change the statute. This applies to both parties, to the Commissioner, and the taxpayer.

"The statute stated the law. The Supreme Court has construed it. Regulations were considered by the Court when it gave its construction in the Sanford case."

We find no reason to change our view thus expressed, and petitioner's contention in this respect must be denied.

Having decided that a taxable gift was made by the donor in 1936, it becomes necessary to consider the second contested issue; that is, did petitioner become liable for such tax? Sec. 501 of the Revenue Act of 1932, c. 209, 47 Stat. 169, 26 U.S. C.A. Int.Rev.Acts, page 580, provides (a) for the imposition of a tax upon property by gift, and (b) that the tax shall apply whether the transfer is in trust or otherwise. Sec. 509 provides that such tax shall be paid by the donor on or before the 15th day of March following the close of the calendar year. Sec. 510 provides that such tax shall be a lien upon all gifts made during the calendar year, for ten years from the time the gifts are made, and also, in the event that such tax is not paid when due, that the donee shall be personally liable for such tax to the extent of the value of such gift. Sec. 513 (a) authorizes the Commissioner to send a notice of any tax deficiency to the donor, and provides that no assessment of a deficiency and no distraint or proceeding in court for its collection shall be made, begun or prosecuted until such notice has been mailed to the donor. Sec. 517 provides that the amount of taxes imposed by this title shall be assessed within three years after the filing of the return, and bars a court proceeding for the collection of such taxes after the expiration of three years subsequent to the filing of the return.

As heretofore suggested, no deficiency notice was served upon the donor, and the notice served upon petitioner was more than three years after March 15, 1937, when the donor filed with the Collector of Internal Revenue his return, disclosing the facts which gave rise to this controversy. Petitioner contends that no proceedings could be instituted against it after the expiration of the three year limitation period. In other words, it contends that the donor and donee were each primarily liable and that this limitation period was applicable to each. Consistent with this argument, it is pointed out that if the tax was not paid by the donor on or before March 15, 1937, the donee immediately became personally liable. It does not follow, however, even though this argument be tenable, that both the donor and the donee are...