Court Opinion

ID: 4625811
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:57:55.45529+00
Date Added: 2024-06-11T07:56:46.340412
License: Public Domain

EDWARD RAYNE MCCOMB HERZOG, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Herzog v. CommissionerDocket No. 91581.United States Board of Tax Appeals41 B.T.A. 509; 1940 BTA LEXIS 1169; March 5, 1940, Promulgated 1940 BTA LEXIS 1169">*1169  In computing gift tax on property transferred in turst, the value of the property transferred need not be reduced by the value of income of the trust which the trustee in his uncontrolled discretion has power to pay to the grantor.  William Byrd, Esq., for the petitioner.  Harold D. Thomas, Esq., for the respondent.  STERNHAGEN 41 B.T.A. 509">*509  The Commissioner determined a deficiency of $9,297.90 in petitioner's gift tax for 1935.  Petitioner contends that the value of property transferred in trust should be reduced for gift tax purposes by an amount representing the value of the income for life receivable by him if a trustee in his unrestricted discretion should so direct.  FINDINGS OF FACT.  Petitioner, a resident of New York City, is married and the father of three minor children.  On August 23, 1935, when thirty-three years of age, he transferred bonds of a market value of $214,137.38 to the Bank of New York & Trust Co. and to Douglas S. Gibbs, as trustees, to hold, manage, invest, and reinvest, to collect the income to pat all proper charges and expenses, and to pay the net income to petitioner and his wife at such times and in such proportions1940 BTA LEXIS 1169">*1170  as Gibbs should deem proper as long as petitioner and his wife should live together as husband and wife; upon the wife's death or her ceasing to live with petitioner, the net income was to be paid to petitioner and his children as Gibbs should deem proper; upon petitioner's death prior to that of his wife, the trust fund was to be divided into equal shares for the wife and children, and the net income of the wife's share paid to her for life and of each child's share to the child until he should reach the age of twenty-five years, when he was to receive the principal.  The wife's share was, on her death, to be added to those of the children, and a child's share was to go to his descendants in case the child should die before reaching twenty-five years of age.  The trustees had unrestricted power to invest and reinvest principal except in respect of two securities, which they could not transfer without petitioner's consent.  On August 23, 1935, trustee Gibbs directed that all trust income be paid to petitioner, and petitioner has ever since received the entire net income.  After transfer of the securities to the trust, petitioner owned other securities of a value of $50,000, an interest1940 BTA LEXIS 1169">*1171  in his 41 B.T.A. 509">*510  mother's estate of a value of $200,000, and an interest in a partnership of a value of $100,000.  From these properties and from the trust securities before their transfer in trust, petitioner received income of $35,800 in 1935.  Petitioner's wife owns property of a value of about $9,000, which produced income of $104.52 in 1938.  She is dependent on petitioner for support and he has regularly supported her and their children.  In determining petitioner's gift tax for 1935, the Commissioner included in total gifts $214,137.38 representing the value of the securities transferred in trust.  OPINION.  STERNHAGEN: The petitioner concededly made a transfer by gift in trust.  He contends that only the remainder interest in the corpus may be used to measure the gift tax.  The income, he says, was not the subject of the gift.  Apparently he has been taxed under the income tax upon the income which by virtue of the trustee's direction was distributed to him.  There would be no doubt of his nonliability for gift tax upon the value of the income if he had reserved to himself the absolute right to the income for his life.  Cf. 1940 BTA LEXIS 1169">*1172 ; . But he made no such reservation.  He transferred the entire property.  Whether he would enjoy any of its income depended entirely on the trustee, who, in his uncontrolled discretion, could deprive him of it completely.  It was only be virtue of the trustee's direction, which on this reocrd must be regarded as entirely voluntary, that the donor received any of the income; and this direction might be terminated whenever the trustee deemed it proper that the wife should receive the income.  Such a hope or passive expectancy is not a right.  It is not enough to lessen the value of the property transferred.  . Since the transfer by the petitioner was complete, the gift tax is, by its own terms, applicable to the value of the entire property transferred.  There is, however, always the necessity of not overlooking the interrelation of the gift tax and the estate tax, 1940 BTA LEXIS 1169">*1173 . While in this proceeding no decision may be made as to the inclusion of the trust property in the donor's gross estate at the time of his death, nothing which can now be foreseen as to a possible estate tax would be at variance with the present decision. Decision will be entered for the respondent.