Newman v. Comm'r of Internal Revenue, Docket No. 29650.

• Decision Date: 22 January 1953
• Docket Number: Docket No. 29650.
• Citation: 19 T.C. 708
• Parties: LOIS J. NEWMAN (FORMERLY LOIS J. SENDERMAN), PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

19 T.C. 708

LOIS J. NEWMAN (FORMERLY LOIS J. SENDERMAN), PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 29650.

Tax Court of the United States.

Promulgated January 22, 1953.

Samuel Taylor, Esq., and Walter G. Schwartz, Esq., for the petitioner.

Edward H. Boyle, Esq., for the respondent.

1. Held, neither the oral trust nor the written trust here involved was ‘expressly made irrevocable by the instrument creating the trust * * * ‘ as provided in section 2280, Civil Code of California.

2. Held, transfer of trust assets on May 2, 1946, to guardianship estate of minor beneficiary constituted a taxable gift. Harris v. Commissioner, 340 U.S. 106, distinguished.

3. The value of the gift consummated May 2, 1946, held, not to include a certain item in the amount of $64,035.05, the existence of which is the subject matter of a separate income tax proceeding by the same taxpayer in another docketed case currently pending hearing before this Court.

This proceeding involves a deficiency in gift tax of petitioner for the year 1946 in the amount of $71,195.99.

The issues presented are: (1) Whether the transfer by petitioner in 1943 of certain property in trust constituted a completed gift in that year or whether, as determined by respondent, the completed gift occurred in 1946 upon termination of the trust and distribution of the corpus to the guardian for the beneficiary; and (2) whether such gift, if effected in 1946, included an item described in respondent's notice of deficiency as ‘Overpayment of Income Tax and Accrued Interest for the Years 1943-1945‘ at a value of $64,035.05.

One other issue raised by the pleadings herein has been settled by stipulation of the parties and will be reflected in a Rule 50 computation.

FINDINGS OF FACT.

So much of the facts as were stipulated are made a part hereof by this reference.

The petitioner is an individual residing in Sherman Oaks, California. The gift tax return for the calendar year 1946, here involved, was filed on or about June 23, 1947, with the collector of internal revenue for the first district of California, at San Francisco.

Petitioner was divorced from Aaron Senderman in 1940. Thereafter she was unmarried and her name at all times material hereto prior to December 1944, was Lois J. Senderman. In December 1944, petitioner married Louis Newman, and her name from that time to the present has been Lois J. Newman. Petitioner has had only one child, a daughter, named Lois E. Senderman, who was born on May 14, 1935.

For a number of years prior to January 1, 1943, petitioner owned as her separate property 2,396 7/8 shares of stock of Aztec Brewing Company (hereinafter called Aztec), a California corporation operating a brewery in San Diego, California. These shares represented approximately one-fourth of the issued and outstanding stock of such corporation, and had been inherited by petitioner from her parents in 1935.

On or about January 1, 1943, Richard S. Goldman, who was petitioner's attorney from 1935 until his death in 1946, received from petitioner 800 shares of stock in Aztec, to be held in trust by him for petitioner's daughter, Lois E. Senderman. At the time of the receipt, Goldman orally declared himself to be trustee of such trust, effective immediately. Some 6 or 7 months thereafter, Goldman, as trustee, executed a written declaration of trust under which he declared himself trustee of 800 shares of Aztec stock for the benefit of Lois E. Senderman. This declaration of trust was predated to January 1, 1943. Such declaration of trust was not ‘expressly made irrevocable.‘

Petitioner filed Federal and State of California gift tax returns for the calendar year 1943 in which she reported a gift to her daughter of 800 shares of Aztec stock by reason of the creation of the foregoing trust. The value of such gift was reported in the Federal return as $30,000 with no gift tax payable thereon.

On or about February 24, 1944, Aztec Brewing Company, a limited partnership, was formed. On or about March 31, 1944, Aztec Brewing Company, a corporation, was dissolved. The assets and liabilities of the corporation were transferred to the partnership. The stockholders in the corporation became partners in the new partnership with partnership interests proportionate to their respective stockholdings in the corporation. The trust for Lois E. Senderman became a limited partner with an 8 per cent partnership interest. The fair market value of an 8 per cent interest as a limited partner of Aztec, a limited partnership, on May 2, 1946, and throughout the calendar year 1946, was $151,051.09.

On March 1, 1946, Richard S. Goldman died. On March 26, 1946, Richard N. Goldman, his son, was appointed the executor of his estate and on that day qualified as such. On April 5, 1946, Clarissa Shortall, as attorney for Richard N. Goldman, filed a petition for appointment of successor trustee or trustees in place of the deceased trustee, and was appointed on that day successor trustee to Richard S. Goldman by order of the Superior Court in and for the city and county of San Francisco, California.

On May 2, 1946, upon petition of the substitute trustee so appointed, the Superior Court in and for the city and county of San Francisco, California, appointed Clarissa Shortall as guardian of the estate of Lois E. Senderman. On that date the assets of the trust for the minor, Lois E. Senderman, were transferred to Clarissa Shortall pursuant to the court order appointing her as guardian. Clarissa Shortall had been associated with the elder Goldman and had participated with him in the handling of the trust matters. The appointment of a guardian and creation of the guardianship estate was provided for in the original trust indenture executed as of January 1, 1943, upon resignation or death of the original trustee.

After the revenue agent, who examined the tax returns of petitioner and her daughter, raised a question as to the revocability of the daughter's trust, Clarissa Shortall, on or about April 22, 1947, as guardian for such minor, filed a petition with the Superior Court in and for the city and county of San Francisco, California, for instructions. Paragraph 6 thereof reads, in part, as follows:

6. That it was the intention of said Lois J. Newman, said trustor and donor, and of Richard S. Goldman, said Trustee, that said trust * * * be irrevocable and that the gift made thereby be irrevocable; and that the failure so to state specifically in said Declaration of Trust occurred through inadvertence and error and contrary to the express instructions of said Lois J. Newman.

On or about June 23, 1947, Clarissa Shortall further filed with such court an amended petition for instructions in which, for the first time, reference was made to the existence of an oral trust. In addition, it is stated therein that through inadvertence and error the written trust failed to contain an express provision as to its irrevocability.

On June 24, 1947, petitioner filed, as a protective measure, a gift tax return relating the history of the trust and claiming no gift tax then due for the year 1946, such return showing no tax due.

On July 10, 1947, a court hearing was held on the amended petition and evidence, both oral and documentary, was offered. Clarissa Shortall, as guardian, appeared in person and by her attorney. Petitioner also appeared in person and by her attorney. After the case was heard and argued the court entered an order wherein it adjudged and decreed that:

1. On or within a few days after January 1, 1943, said Lois J. Senderman (now Lois J. Newman) orally created an irrevocable trust by instructing Richard S. Goldman to act as trustee of 800 shares of stock of Aztec Brewing Company, the certificates of which he held in his possession and by said Richard S. Goldman orally agreeing to do so. Said oral trust became effective immediately upon its creation and continued in effect until terminated by the appointment of Clarissa Shortall as guardian of the estate of said minor on May 2, 1946, and the transfer on or about said date of said trust property to said guardian.

2. Some six or seven months after the creation of said oral trust said Richard S. Goldman executed a written trust. * * * Said written trust was intended to embody the terms of said oral trust.

3. Said written trust did not terminate or modify said oral trust theretofore created but said oral trust continued in effect until terminated on May 2, 1946, by the appointment of Clarissa Shortall as guardian of the estate of said Lois E. Senderman and the transfer of the trust property to her as said guardian.

4. Said Clarissa Shortall as such guardian has held and now holds said property irrevocably for the use and benefit of said minor.

The petitioner and her minor daughter, during the calendar year 1943, and during all subsequent years, were on a calendar year cash basis for Federal and State of California income tax purposes. The trust for the minor during the calendar year 1943 and during all subsequent years until its termination in 1946, was on a calendar year cash basis for Federal and State of California income tax purposes. For the calendar year 1943 and for all subsequent years, the trust for Lois E. Senderman (up to the time of its termination) and/or that for the minor reported in their respective Federal and State of California income tax returns the entire income from 800 shares of Aztec stock and from the partnership which replaced that corporation and from the other investments which were purchased with the income from the 800 shares and the distributions from the partnership.

By means of letters of the type commonly known in Federal tax circles as 30-day letters, addressed to the trust and to the minor, both of which letters being dated August 25, 1949, the internal revenue agent in charge, San Francisco division, proposed overassessments in income tax in favor of the trust and of the minor for...