Rosenau v. Commissioner of Internal Revenue, Docket No. 86407.

• Decision Date: 15 March 1938
• Docket Number: Docket No. 86407.
• Citation: 37 BTA 468
• Parties: HARRIET W. ROSENAU, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Board of Tax Appeals

37 B.T.A. 468 (1938)

HARRIET W. ROSENAU, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 86407.

Board of Tax Appeals.

Promulgated March 15, 1938.

Fred W. Weitzel, Esq., and Morris H. Goldman, Esq., for the petitioner.

Frank T. Horner, Esq., and Harold F. Noneman, Esq., for the respondent.

The respondent determined a deficiency of $311.73 in gift tax for the calendar year 1934 resulting from the determination that petitioner had conveyed property by gift of a net value of $23,838.81.

Petitioner contends that no gifts were made in the taxable year so that there is no gift tax liability.

FINDINGS OF FACT.

Petitioner is an individual residing in Philadelphia. Petitioner filed a gift tax return for the year 1934 with the Collector of Internal Revenue at Philadelphia for information purposes, setting forth the transaction but reporting no tax as being due.

On November 19, 1934, petitioner executed an indenture of trust and conveyed securities to the trust having a fair market value of $69,990.63. The trust is irrevocable. The grantor reserved to herself the right to receive the net income from the corpus of the trust for and during the term of her natural life. The grantor, among other things, reserved to herself the power to direct by written instrument in the nature of a testamentary document the manner of distributing the corpus and accumulated undistributed income of the trust upon her death. The trust deed provides that, in the event the grantor fails to exercise the reserved power to designate the beneficiary of the remainder interest, the trust shall continue during the lifetime of the grantor's son, Howard, and upon his death the trustee is to divide the trust estate into as many shares as there may be issue of the grantor surviving or issue of the grantor's deceased children and to hold each share of the corpus in the trust for such child until such child arrives at the age of 30 years.

The Commissioner determined that the value of the remainder interest, after the expiration of the life estate reserved by petitioner, was a gift for gift tax purposes having a value of $23,838.81, applying the factor .34064 for the age of the grantor, 35 years. Respondent allowed no exclusions or specific exemptions from gift tax but computed a deficiency of $311.73 tax upon the present value of the remainder interest, namely, $23,838.81.

OPINION.

HARRON:

The question presented in this proceeding is whether a transfer in trust wherein the donor reserves to herself a life estate in the net income and the power to name or change the beneficiaries of the corpus of the trust and direct the manner of distributing the corpus and undistributed accumulated income of the trust upon her death, is a gift to the extent of the remainder interests after the donor's death, and taxable under section 501 (a) and (b) of the Revenue Act of 1932. The trust instrument expressly provides that "this document and the trust hereby created" shall be irrevocable by the settlor.

The respondent determined that the present value of the remainder interest is $23,838.81. There is no dispute as to this computation. He contends that petitioner has made a completed gift of the remainder interest which is subject to the gift tax.

The petitioner contends that there was no gift because the settlor had retained the benefit of the property conveyed to a trust during her lifetime and the right to designate the beneficiaries of the property upon her death. We agree with the petitioner.

The respondent relies upon Thomas E. Wells, 34 B. T. A. 315; affd., Commissioner v. Wells, 88 Fed. (2d) 339. This case may be distinguished upon its facts and is not controlling here. In the Wells case the taxpayer transferred property by irrevocable trust providing for accumulation of income until the named beneficiary attained the age of 21 years, and payment of income to the beneficiary thereafter until the age of 30, or the death of his mother, whichever occurred first, when he was to receive the corpus. The question there was whether the donor was entitled to the exemption of $5,000, allowed in case of gifts other than of future interests under section 504 (b) of the Revenue Act of 1932. The donor reserved no interest whatever in the corpus and retained no power to name or change the beneficiary to receive the corpus. The beneficiaries of the trust were living and were designated in the instrument.

Here, the settlor reserved a life estate in the trust property and the power to name or change the persons to receive the corpus ultimately. The remaindermen were undetermined. The trust provided for a life estate after the death of the settlor and the remainder to settlor's surviving children or issue of deceased children when they attained 30 years of age when the trust would cease and determine. The question here was not in the Wells case and arises under a different section of the statute.

The petitioner relies on Hesslein v. Hoey, 18 Fed. Supp. 169; affd., Hesslein v. Hoey, 91 Fed. (2d) 954. In the Hesslein case the settlor conveyed property to trustees...