Lockard v. Commissioner of Internal Revenue

• Decision Date: 05 February 1948
• Docket Number: No. 4255.,4255.
• Citation: 166 F.2d 409
• Parties: LOCKARD v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — First Circuit

166 F.2d 409 (1948)

LOCKARD v. COMMISSIONER OF INTERNAL REVENUE.

No. 4255.

Circuit Court of Appeals, First Circuit.

February 5, 1948.

James D. Dow, of Boston, Mass., for petitioner.

Helen Goodner, Sp. Asst. to the Atty. Gen. (Theron L. Caudle, Asst. Atty. Gen., and Helen R. Carloss, Sp. Asst. to the Atty. Gen., on the brief), for Commissioner of Internal Revenue.

Before MAGRUDER, MAHONEY and WOODBURY, Circuit Judges.

MAGRUDER, Circuit Judge.

Barbara M. Lockard petitions for review of a decision of the Tax Court of the United States determining that "there is a deficiency in gift tax of $5,517.39 for the year 1941." 7 T.C. 1151.

Petitioner undoubtedly made a taxable gift in 1941. In her return she claimed the full $40,000 specific exemption. Internal Revenue Code, § 1004, 26 U.S.C.A. Int.Rev. Code, § 1004. The Commissioner disallowed this exemption to the extent of $22,595.95 on the ground that petitioner had claimed and been allowed an exemption of $19,363.93 in respect of a taxable gift made in 1938 and an exemption of $3,232.02 in respect of a taxable gift made in 1939. Petitioner now contends that she erroneously reported taxable gifts in 1938 and 1939, and therefore that no part of the specific exemption was properly consumed in either year. It is conceded by the Commissioner that the amounts which were claimed as exemptions in 1938 and 1939 were "allowed" within the meaning of I.R.C. § 1004(a) (1) — and thus pro tanto exhausted the $40,000 specific exemption — only if the taxpayer made taxable gifts in those years. Kathrine Schuhmacher v. Commissioner, 8 T.C. 453, 464 (1947); Carl J. Schmidlapp v. Commissioner, 1941, 43 B.T.A. 829. On this branch of the case the question is whether the beneficiary's irrevocable right to receive the income from the corpus of a short term trust constitutes a taxable gift in the year in which the property is transferred to the trust, notwithstanding the fact that the settlor may remain taxable on such income under the doctrine of Helvering v. Clifford, 1940, 309 U.S. 331, 60 S.Ct. 554, 88 L.Ed. 788.

There is also a question as to the valuation for gift tax purposes of the gift in 1941 of a right to income for life, with discretionary power in the trustee to distribute corpus up to a certain amount in each year if he deemed it necessary for the life tenant's comfortable maintenance and support.

On March 30, 1938, the petitioner created an irrevocable trust, with herself and another as cotrustees, under the terms of which the entire net income was directed to be paid to Derwood W. Lockard, her husband, for a term of six years; and upon April 1, 1944, or if the husband should die earlier, then on the date of his death, the principal was to revert to the settlor, free of trust. On March 30, 1939, the petitioner transferred additional property to the trust.

The Tax Court held that the transfers in trust in 1938 and 1939 constituted taxable gifts to Mr. Lockard, in those years, of the right to receive the income for a term of years; and therefore that the amounts of specific exemption claimed by petitioner in her gift tax returns for those two years, and allowed by the Commissioner, must be deducted from the $40,000 specific exemption claimed by her in her return of the 1941 gift. We agree with this conclusion. Valuation of these gifts in 1938 and 1939 is covered by stipulation and is not in dispute.

Section 501(b) of the Revenue Act of 1932, 47 Stat. 245, 26 U.S.C.A. Int.Rev.Acts, page 580, which is applicable to the transfers in 1938 and 1939, provides that the gift tax is applicable "whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible". That the broad sweep of this language was not inadvertent is emphasized in the committee reports. H.R.Rep. No. 708, 72d Cong., 1st Sess., at p. 27, stated: "The terms `property,' `transfer,' `gift,' and `indirectly' are used in the broadest and most comprehensive sense; the term `property' reaching every species of right or interest protected by law and having an exchangeable value." See to the same effect Sen.Rep. No. 665, 72d Cong., 1st Sess., p. 39. See also Smith v. Shaughnessy, 1943, 318 U.S. 176, 180, 63 S.Ct. 545, 547, 87 L.Ed. 690, in which the court states that the amplitude of legislative purpose, thus expressed, "is broad enough to include property, however conceptual or contingent."

By the transfer in trust in 1938, Mr. Lockard acquired an equitable right to the income from the property for a period of six years, subject only to his earlier death. He then received a legally protected interest "having an exchangeable value"; and the commuted value of this right to future income is readily calculable. Helvering v. McCormack, 2 Cir., 1943, 135 F.2d 294, 296. See art. 19(7) of Regulations 79 (1936 Ed.). To the extent of this interest, the settlor abandoned control of the property upon its transfer in trust. Not only did the settlor reserve no power to revoke, and revest in herself, the beneficial interest thus donated; she could not even modify the donee's interest or shift the benefit, in whole or in part, to another. The transfer, therefore, meets every test of taxability under the language of the Act and under the criteria laid down in Smith v. Shaughnessy, supra. The same may be said of the additional transfer to the trust made in 1939.

The foregoing conclusion would have seemed inevitable and inescapable if one had never heard of Helvering v. Clifford, 1940, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788, a case involving income tax liability. It is recited in the stipulation in the case at bar that the distributable trust income for the years 1938-1941, inclusive, was included by the Commissioner in the income of Mrs. Lockard under I.R.C. § 22(a), 26 U.S.C.A. Int.Rev.Code, § 22(a), as interpreted in the Clifford case. Exegesis of Helvering v. Clifford has proceeded apace, and not without difficulty, in a large volume of subsequent litigation in the lower federal courts. See United States v. Morss, 1 Cir., 1947, 159 F.2d 142. No doubt there would be many judicial sighs if the great body of Clifford learning had to be imported into gift tax litigation. But as this court held in Commissioner v. Prouty, 1 Cir., 1940, 115 F.2d 331, 337, 133 A.L.R. 977, "the gift tax does not seem to be so closely integrated with the income tax that decisions like the Clifford case extending the applicability of Section 22(a) to the grantor of a trust, must necessarily be read as holding that no gift tax was payable upon the creation of the trust."¹ We tried to point out again, at considerable length, in Higgins v. Commissioner, 1 Cir., 1942, 129 F.2d 237, certiorari denied 1942, 317 U.S. 658, 63 S.Ct. 57, 87 L.Ed. 529, that under existing provisions of law respecting income, gift and estate taxes, it is quite impossible for the courts to achieve a complete integration of these three taxes. Chief Justice Stone made an apparent effort in Estate of Sanford v. Commissioner, 1939, 308 U.S. 39, 60 S.Ct. 51, 84 L.Ed. 20, to bring about a measure of correlation between the gift tax and the estate tax, by his statement page 44 of 308 U.S., page 56 of 60 S.Ct., 84 L.Ed. 20, that the test of completeness of a transfer for purposes of the gift tax is no different "from that to be applied in determining whether the donor has retained an interest such that it becomes subject to the estate tax upon its extinguishment at death." Cf. Higgins v. Commissioner, supra, 1 Cir., 129 F.2d at page 240-242. But in Smith v. Shaughnessy, 1943, 318 U.S. 176, 63 S.Ct. 545, 87 L.Ed. 690, the Supreme Court disavowed any intention to intimate in the Sanford case that there was "a general policy against allowing the same property to be taxed both as an estate and as a gift" page 178 of 318 U.S., page 546 of 63 S.Ct., 87 L.Ed. 690; and pointed out that the plan of Congress for integrating the estate and gift taxes is to be found in the provision of law granting a credit on estate taxes by reason of previous payment of gift taxes on the same property — a "system of secured payment on gifts which will later be subject to the estate tax" page 179 of 318 U.S., page 547 of 63 S.Ct., 87 L.Ed. 690. Aside from this, it seems that for the most part any correlation that may exist between the three taxes is "purely coincidental".

Petitioner does not contend that there is a complete integration between the income tax and gift tax, so that the mere fact that a transfer leaves the transferor still liable to income tax on the property always negatives a gift tax liability; but she does argue that the same question of fact underlies both liability for income tax under the Clifford rule, and liability for gift tax — namely, whether the settlor, after the transfer in trust, remains in substance the owner of the corpus. If, notwithstanding the transfer, the settlor is deemed to remain in substance the owner of the corpus, the income therefrom — the fruit of the tree — is, for income tax purposes, attributable to the settlor, and the settlor does not escape an income tax thereon "by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another, since, by the exercise of his power to command the income, he enjoys the benefit of the income on which the tax is laid." Harrison v. Schaffner, 1941, 312 U.S. 579, 582, 61 S.Ct. 759, 761, 85 L.Ed. 406. See Commissioner v. Bateman, 1 Cir., 1942, 127 F.2d 266, 271-274. Petitioner argues from this that, for income tax purposes, the result is the same as if the settlor of the short term trust had continued to receive the income yearly and had made a series of assignments of such income. It is contended, further, that similar treatment for gift tax purposes is appropriate, so that no gift tax should be payable when the trust is created, but actual payments of income to the beneficiary should be taxable as...