Court Opinion

ID: 4604593
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:34:35.559147+00
Date Added: 2024-06-11T07:53:02.441836
License: Public Domain

MARTHA F. MASON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Mason v. CommissionerDocket No. 92376.United States Board of Tax Appeals46 B.T.A. 682; 1942 BTA LEXIS 829; March 18, 1942, Promulgated *829  During the taxable year petitioner made a gift of certain policies of insurance on her own life to a trust, the income from which was to be paid to a charitable institution during her life.  After her death, the trust was to continue in perpetuity for the charity unless certain individuals should exercise a power of appointment within ten years after payment of the proceeds of the insurance policies.  Held, since the charitable remainder was subject to being diverted through the exercise of the power of appointment, it was uncertain in fact and incapable of valuation, and that petitioner is not entitled to any charitable deduction under section 505(a)(2) of the Revenue Act of 1932; held, further, petitioner is not entitled to any deduction with respect to the life interest in the insurance policies which was given to the charity, since she has failed to prove the value thereof.  2.  During the taxable year petitioner also made gifts of property to a number of trusts for individual beneficiaries.  Each trust provided that the income was to be accumulated for a fixed period before any payment should be made to the beneficiary.  Held, the gifts were of future interests*830  and petitioner is not entitled, under section 504, Revenue Act of 1932, to any $5,000 exclusions with respect thereto.  J. Merrill Wright, Esq., for the petitioner.  William A. Schmitt, Esq., for the respondent.  VAN FOSSAN *682  Respondent determined a deficiency of $32,983.18 in petitioner's gift tax for the year 1935.  Petitioner denies that there is any deficiency *683  due and claims that she has made an overpayment of gift tax for the year in question.  FINDINGS OF FACT.  The facts are stipulated and we hereby adopt them as our findings of fact.  They may be summarized as follows: Petitioner is an individual.  During the period in question she resided in Pittsburgh, Pennsylvania, and had her principal office at 1502 Union Bank Building, Pittsburgh, Pennsylvania.  She filed her gift tax return for the year 1935 with the collector of internal revenue for the twenty-third district of Pennsylvania before March 15, 1936.  During the year 1935 and prior to December 28, 1935, petitioner purchased eight single premium life insurance policies upon her own life in which her estate was nominated beneficiary.  The total amount of premiums*831  paid was $356,867.80, which is the amount anyone of the same age, sex, health, physical condition, family history, etc., would have been required to pay for like policies under the same circumstances.  On December 28, 1935, petitioner by irrevocable assignment caused the beneficiary in each policy, as well as in certain annuity policies issued by the same companies, to be changed from her estate to the Union National Bank of Pittsburgh, as trustee, under a deed of trust, dated and executed by her on December 28, 1935.  The deed of trust contained the following provisions: 1.  To take, hold, collect, invest, manage and control the trust estate and for and during the continuance of the trust, at least once each year, pay the net income arising therefrom to ALLEGHENY GENERAL HOSPITAL (Pittsburgh, Pennsylvania) to be used for the furtherance of its charitable objects and purposes in manner as the trustees or other governing body thereof may from time to time direct.  2.  The trust estate shall be deemed to comprise the several policies of insurance and annuity set forth in Schedule A, the proceeds of any such policies received upon the death of the insured and any investment and/or*832  reinvestment of the same, and any cash, stocks, bonds or policies of insurance which, in accordance with a subsequent provision hereof, may be added to the trust estate and any investments and/or reinvestments of the proceeds thereof.  3.  The net income of the trust estate shall be taken to include the amount of all annuity payments, all dividends or other returns received from any policy of insurance excepting such surplus or other dividends which may be applied to the purchase of paid up additions to the sum insured, and all interest, dividends or other returns from any investment held, less the costs and expenses of administration.  4.  The trust shall not continue, except as hereinafter provided, beyond the maturity, by death of the insured, of all policies of insurance held in the trust estate and the payment of all sums due and payable thereunder and the payment of all annuities and for a period of ten years after all such payments have been made.  5.  Whenever at any time after all of said policies have matured and been fully paid and all required annuities have been discharged and Henry Lee *684  Mason, Jr., Charles Lockhart McCune and George Dilworth Lockhart, *833  husband and nephews of the Donor, or any two of them or the survivor of the three, or in the event none of them be living, the President or other chief Executive Officer of The Union National Bank of Pittsburgh, and all of whom are hereby given full discretionary power and authority to act, shall file with the Trustee, at its principal office, their or his written declaration terminating the trust and designating the beneficiary or beneficiaries to whom the trust estate shall pass with the amount or proportion each beneficiary shall be entitled to receive, the Trustee thereupon shall divide, convey and pay over the entire trust estate in its hands to the person or persons, object or purpose, designated to receive or enjoy the same and the trust hereby established shall be at an end, PROVIDED, should no declaration of termination and designation be filed within the period of ten years as above set forth, the trust estate shall remain in the hands of the Trustee, the trust shall continue for all time and the net income shall, quarterly each year, be paid to said ALLEGHENY GENERAL HOSPITAL to be used in furtherance of its charitable objects and purposes in manner as the trustees or other*834  governing body thereof may from time to time direct, and PROVIDED FURTHER, no designation shall include as a beneficiary any person having the power and authority to make a designation, nor shall any part of the trust estate inure to his benefit, the benefit of his estate nor to the benefit of the estate of the Donor.  The Allegheny General Hospital is a charitable corporation, Gifts to which are exempt under the provisions of the gift tax act.  At the time of the transfer of the trust the various policies had a combined cash surrender value of $297,615.55.  Petitioner in her return erroneously stated the total cash surrender value to be $298.784.48.  Respondent increased the valuation for gift tax purpose to $356,867.80.  Petitioner concedes that the cost basis of the insurance policies as determined by respondent is the correct value for gift tax purposes if the gift is subject to gift tax.  Petitioner was born on January 20, 1870, and on December 28, 1935, the date that the gifts of life insurance policies were made, was actually 65 years of age.  On that date she was for life insurance purposes 66 years of age and had a life expectancy, based upon such insurance age according*835  to standard life insurance mortality tables, of ten and one-half years.  In addition to the gift of the above insurance policies petitioner in 1935 established 16 other trusts in which various individuals were named beneficiaries.  Trust No. 1626, created by petitioner on August 10, 1935, had as beneficiaries 12 individuals who were to share equally the principal and accumulated income on the death of petitioner-donor.  The remaining 15 trusts each had a single beneficiary and no beneficiary of any of them was a beneficiary of any of the other trusts except that the beneficiaries of 12 of the 15 trusts were beneficiaries of Trust No. 1626.  MARTHA F. MASON.  *685  Twelve of the trusts were identical except as to beneficiary and contained the following provision: 1.  To take, hold, invest, manage and control said trust estate and quarterly each year until the expiration of the year one thousand nine hundred and forty (1940) pay the net income arising therefrom to [the beneficiary], PROVIDED HOWEVER, no distribution of income shall be made to her prior to the first day of January in the year on thousand nine hundred and thirty-seven (1937).  Should [the beneficiary] *836  be living on the first day of January in the year one thousand nine hundred and forty-one (1941) the Trustee shall convey and pay over to her the entire trust estate in its hands and the trust hereby established shall be at an end.  If, however, she should die prior to the first day of January in the year one thousand nine hundred and forty-one (1941) the trust shall end on the date of her death and the trust estate thereupon shall be conveyed and paid over to such person or persons as she by her last will shall appoint to receive the same, or in default of any appointment shall go to and vest in the person or persons who would be entitled to take from her under the laws of the Commonwealth of Pennsylvania as though she had died intestate.  Two more of the trusts provided for accumulation of the income until January 1, 1939, at which time the trust was to terminate and the entire fund be paid over to the beneficiary.  In the event of the death of the beneficiary prior to January 1, 1939, the trust was to terminate and the trust estate be divided, in one case, among the heirs of the beneficiary, and in the other, to the son of the beneficiary or the son's heirs.  There is no controversy*837  as to the value of the gift to the remaining trusts nor as to the amount of the exclusion allowable.  At the date of the creation of the trust all of the individual beneficiaries were of full age and sui juris.Petitioner also made outright gifts in 1935 which she returned, for gift tax purposes, at a value of $119,618.75, which value respondent has determined to be $119,681.25.  Petitioner does not contest this increase.  In her gift tax return petitioner claimed exclusions to the amount of $90,000, representing 18 gifts - being the gift of the life insurance policies, the gift of the above 15 trusts, except No. 1626, and two outright gifts.  Respondent allowed petitioner exclusions only to the amount of $18,800, made up of three $5,000 allowances for the trust, which was not in dispute, and the two outright gifts, and $3,500 and $300, representing outright gifts to two of the beneficiaries in the remaining trusts.  OPINION.  VAN FOSSAN: The questions for decision are (1) whether petitioner is entitled to a charitable deduction with respect to the gift to the trust for the Allegheny General Hospital and, (2) whether various other gifts in trust which petitioner made*838  during the taxable year were gifts of future or present interests.  *686  The deed of trust under which the insurance policies were transferred for the benefit of the Allegheny General Hospital provided that the trust should not extend for more than ten years after payment of the policies unless the settlor's husband and two nephews or, in case of their death, an executive officer of the Union National Bank should fail within that period to terminate the trust and designate beneficiaries to whom the corpus should be paid.  The interest of the charity was, therefore, subject to being defeated by exercise of a power of appointment.  At the time of the gift, it was impossible to tell whether that power would ever be exercised and, if it was exercised, when this would occur.  It is thus impossible to hold that the hospital would be the ultimate beneficiary.  Moreover, a charitable remainder subject to such a contingency is so uncertain as to be incapable of valuation.  See ; *839 ; ; ; . Since the fact of the charitable remainder is uncertain and its value can not be ascertained, petitioner is not entitled to any deduction therefor under section 505(a)(2) of the Revenue Act of 1932.  Petitioner contends that, if the value of the entire trust is not deductible, at least that part is deductible which represents the interest in the trust given to the charity for the life of the settlor.  Respondent has permitted a deduction for the life interest of the charity in the annuities transferred.  The only dispute is as to what deduction, if any, should be allowed for the life interest of the charity in the insurance policies.  The value of the life interest in the insurance policies, as such, is limited to the value of the anticipated dividends over the period of the life expectancy of the insured, who is, in this case, the donor.  The trust provided that the net income shall be taken to include "all dividends or other returns*840  received from any policy of insurance excepting such surplus or other dividends which may be applied to the purchase of paid up additions to the sum insured * * *." The record does not show, however, what the provisions of the policies were with respect to use of the dividends for purchase of additional insurance.  There is the possibility that all dividends were to be so used and that there was, therefore, no expectancy of income from the policies during the life of the insured.  That being true, the charity would receive no income from the insurance policies.  Thus petitioner has failed to prove that the life interest of the charity in the insurance policies themselves had any value.  Petitioner argues that the value of the life interest of the charity in the policies should be determined by discounting the cost of the policies for a period representing the life expectancy of the donor *687  at the time of the gift.  Since she has failed to show that the charity would receive any income as long as the funds continued to be invested in the insurance policies, petitioner's argument assumes that the trustee could, at any time, convert the policies into other property at a value*841  equal to the cost of the policies or their cash surrender value.  The exercise of the right to convert is, however, wholly a matter of speculation.  The right to convert the policies into income-producing property was in the trustee and not the charity.  There is no assurance that it would exercise that right.  Furthermore, a reading of the entire trust instrument leads us to the conclusion that the settlor did not intend that the trustee should surrender the policies.  Thus the existence of any income to the charity from the insurance policies during the life of the insured is wholly contingent and incapable of valuation.  Accordingly, petitioner is not entitled to the deduction claimed.  The second issue has to do with the number of $5,000 exclusions to which petitioner is entitled under section 504 of the Revenue Act of 1935.  The answer turns on whether certain of the gifts in trust constitute gifts of present or future interests.  Respondent has allowed exclusions with respect to two outright gifts, a gift in trust for petitioner's husband, and outright gifts amounting to $3,800 to two of the beneficiaries of the trusts set up by petitioner.  Petitioner claims additional exclusions*842  with respect to the gift of the insurance policies in trust for the Allegheny General Hospital and with respect to gifts to 14 other trusts established for individual beneficiaries.  It is clear that petitioner is entitled to no exclusion with respect to the gift of insurance policies, inasmuch as we have held that there is no basis in the record for finding that the gift of the income during petitioner's life had any value.  The gift of the remainder interest is, of course, a gift of a future interest.  The 14 trusts for individual beneficiaries, by reason of similarity in language, fall into two groups.  The first is composed of two trusts which were substantially the same except as to the beneficiary named.  Both trusts were dated December 23, 1935.  The income was to be accumulated until January 1, 1939, at which time the trust was to terminate and the entire fund be paid over to the beneficiary.  In the event that the beneficiary should die before January 1, 1939, the trust was to terminate and the property be distributed, in one case to the heirs of the beneficiary and, in the other, to the son of the beneficiary or, if he be not living, to his heirs.  There was no intervening*843  estate, but the beneficiary was not entitled to receive anything for more than three years after the creation of the trust.  The problem is whether, by reason of that fact, the trust was limited to commence in use, possession, or enjoyment at a future date.  *688  Where the income of a trust is to be accumulated until the beneficiary reaches the age of twenty-one, the gift in trust has been held to be a gift of a future interest. ; certiorari denied, U.S.  (Jan. 5, 1942); ; . Likewise, a gift in which the income was to accumulate during the life of the grantor has been held a future interest. . We see no difference in principle between those cases where the income was to accumulate for an indefinite period but, neverthless, a period which was bound to terminate, and the case at bar where the income was to accumulate for a fixed period.  In either case, the right of the beneficiary to use, possession, or enjoyment is postponed until the future*844  time when the period of accumulation shall end.  Therefore, we hold that the gifts were of future interests.  The second group is composed of 12 trusts, identical except as to the beneficiary, who is, in each case, a nephew or niece of the petitioner.  Each trust was dated December 23, 1935, and was to terminate December 31, 1940.  The trustee was directed to pay the income to the beneficiary quarterly.  No distribution was to be made, however, prior to January 1, 1937.  In case the beneficiary should die prior to the termination of the trust, the property was to go to his or her appointee or, in default of appointment, to his or her heirs at law.  Thus the beneficiary was not entitled to receive any payment of the income until a definite period had elapsed.  The principle applicable is exactly the same as that applicable in the case of the preceding two trusts.  The only difference is that the period of accumulation is shorter.  Nevertheless, the right of the beneficiary to use, possession, or enjoyment was definitely postponed until a future time.  Accordingly, petitioner is not entitled to an exclusion with respect to these gifts.  Decision will be entered for the respondent.*845