Court Opinion

ID: 4623669
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:53:30.509413+00
Date Added: 2024-06-11T07:59:46.996475
License: Public Domain

ALFRED D. EDWARDS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Edwards v. CommissionerDocket No. 102191.United States Board of Tax Appeals46 B.T.A. 815; 1942 BTA LEXIS 814; March 31, 1942, Promulgated *814  1.  Art. 19(9), Regulations 79, is applicable to a gift in trust of a single premium annuity contract.  When the gift is made some time after the date of contract and no comparable contracts are obtainable, the interpolated terminal reserve may be used as a measure of the value of the contract at date of gift.  2.  Petitioner is entitled to an exclusion of $5,000 for each beneficiary.  Helvering v. Hutchings,312 U.S. 393">312 U.S. 393. 3.  A trust instrument providing that income shall be paid on dates determined by the trustee to be convenient and practicable but at least annually and that no beneficiary shall be entitled to income unless in being on the distribution date, does not create a future interest in property.  John H. Letsinger, Esq., and Metellus Thomson, Jr., Esq., for the petitioner.  Gerald W. Brooks, Esq., for the respondent.  VAN FOSSAN *815  The Commissioner determined a deficiency of $8,563.29 in the petitioner's gift tax for the year 1936.  The petitioner filed a claim for refund amounting to $3,910.52.  By his amended answer the respondent claims an additional deficiency of $1,077.79.  Two issues are presented: *815  1.  The proper valuation of eight single premium installment refund annuity contracts with the Prudential Insurance Co. of America, transferred to a trust.  2.  Whether or not the transfers were gifts of future interests within the scope of section 504(b) of the Revenue Act of 1932.  FINDINGS OF FACT.  The petitioner is an individual residing in Elgin, Illinois.  He filed his gift tax returns for the years 1935 and 1936 with the collector of internal revenue for the first district of Illinois.  Margaret Peck Edwards is the wife of the petitioner and George P. Edwards, Alfred H. Edwards, and Robert C. Edwards are his sons.  They were all living on July 1, 1936.  *816  On June 7, 1935, the petitioner gave $7,215 in cash to his son, George P. Edwards.  On August 12, 1935, the petitioner created an irrevocable trust, hereinafter called the insurance trust, and known as trust No. 12,424, with the Northern Trust Co. as trustee.  He transferred to the trustee two life insurance policies on his own life in the Equitable Life Insurance Co., aggregating a face value of $50,000, and one policy of $50,000 in the Mutual Life Insurance Co. of New York.  On August 29, 1935, the*816  petitioner executed an irrevocable trust agreement, hereinafter called the annuity trust, and known as trust No. 12, 476, by which he transferred to the same trustee his note for $164,000, dated August 15, 1935, due one year from date with interest at 4 percent, payable to him and endorsed by him.  He also assigned to the trustee all his interest in four annuity contracts with the Connecticut Mutual Life Insurance Co. and four annuity contracts with the Penn Mutual Life Insurance Co.  His three sons were the individual annuitants in six contracts with the two companies and he and his wife were joint annuitants in two contracts in those companies.  The net income of the trust was to be applied to the payment of insurance premiums on the policies in the insurance trust.  One-half of the net income after paying such premiums was to be paid to Margaret Peck Edwards during her life and at her death to the petitioner's three sons or the surviving of them.  The other one-half was to be paid to the three sons or such as are surviving on the income payment date.  If dead, each son's share was to be paid to his lineal descendants per stirpes. Other provisions relating to survival and termination*817  are not pertinent.  The following paragraph covers income payments: Income payments shall be made upon dates determined by Trustee to be convenient and practicable, but at least annually, if there be any net income distributable hereunder.  No beneficiary shall be entitled to income unless in being on the date appointed for its distribution.  Income shall not be subject to apportionment between income payment dates.  Income payments for the account of a beneficiary might be made in the various ways set forth, in the trustee's discretion.  The trustees were empowered to "enforce, collect, compromise and adjust claims of or against the Trust estate, including in respect of any annuity contract and of Edward's promissory note aforesaid." It was "suggested that until said policies of insurance become fully paid or develop into claims Trustee shall not commute any payments under any annuity contract subject hereto" but the trustee might disregard the suggestion and thus render the commuted payment chargeable with the payment of premiums on policies held under trust No. 12,424.  *817  The value of the eight annuity contracts was agreed to be $97,169.98.  On June 11, 1936, the*818  petitioner executed an additional trust agreement by which, after reciting the above quoted power, he assigned to the trustee eight annuity contracts with the Prudential Insurance Co. of America, hereinafter called Prudential, upon the lives of the persons designated, identified as follows: Contract No.AnnuitantAge of annuitant at date of giftDate of contractMonthly paymentsPurchase priceYearsA-7541Robert C. Edwards17.408-18-34$37.84$10,566.93A-7542George P. Edwards25.358-22-3437.8910,081.39A-7543Alfred H. Edwards21.058-18-3437.8810,373.55A-7544Margaret P. Edwards57.668-18-34301.5858,332.51A-8065George P. Edwards25.3512-12-34125.0033,284.88A-8067Margaret P. Edwards57.6612-12-3416.063,106.63A-11122 *Robert C. Edwards17.4010-15-35125.0034,964.88A-11123 *Alfred H. Edwards21.0510-15-35125.0034,282.38Total806.25194,993.15The annuitants joined in the instrument to evidence their consent thereto and to transfer their interests to the trustee.  The petitioner also paid $5,652.22 in*819  cash to the trustee and transferred his interest in five checks for $730.53 each, theretofore received as payments on the said contracts.  The conditions of the assignments and transfers were the cancellation and surrender of the petitioner's above described note for $164,000; that the checks should be available for the payment of the premiums on the policies deposited under trust No. 12,424; and that the eight annuity contracts with Prudential and the five checks should be added to the corpus of trust No. 12,476.  Certain conditions were also imposed relating to the shares of Alfred H. Edwards and Robert C. Edwards, minors, upon their arriving at legal age.  The trust instrument also provided that the annuity contracts, the five checks, and the cash should be administered according to the terms of the agreement of August 29, 1935.  The petitioner's note of $164,000 was canceled by the trustee.  The transfer of the note to the trustee on August 29, 1935, was referred to in a rider attached to petitioner's gift tax return for 1935 but it was not reported in the return and no tax was paid on account thereof.  On January 1, 1935, Prudential increased its rates for single premium annuity*820  contracts, based on a change from the 3 3/4 percent interest rate and 4 1/2 percent loading charge, used before that date, to a 3 percent interest rate and a 6 1/2 percent loading charge, used thereafter.  Hunter's Table of Mortality was used as a basis of calculation.  *818  In his notice of deficiency the Commissioner determined the value of the eight single premium annuity contracts assigned by the petitioner on June 11, 1936, to be $228,503.84, but at the hearing he reduced that figure to $218,061.29.  On June 11, 1936, no annuity policies or contracts comparable to those assigned by the petitioner under the trust agreement of that date could have been purchased.  On July 1, 1936, the interpolated terminal reserves of the eight annuity contracts aggregated $182,653.56.  This sum represented the gross charges for annuity certain, plus the gross charge for deferred annuity, minus the loading charge of 4 1/2 percent.  Prudential had used the same method of fixing the value of such contracts when the petitioner surrendered a similar contract on October 15, 1935.  The cash surrender value and the commuted value, taken as single factors, produce present values on July 1, 1936, different*821  from the above amount.  The present worth of the interests of the petitioner's wife and sons in the annuity trust (No. 12,476) amounted to more than $5,000 to each annuitant.  The value for purposes of the gift tax of the eight annuity contracts transferred to the trust in 1936 was $182,653.56.  OPINION.  VAN FOSSAN: The first and major issue is the correct valuation of the eight annuity contracts which the petitioner transferred by gift to the trustee of the annuity trust on June 11, 1936.  We find no precise or recognized precedent to serve as a guide in determining this issue, but the Commissioner's regulations suggest a rule which in principle is applicable to the facts before us.  Article 19(9) of Regulations 79 1 provides a method of determining the approximate value of an annuity contract which the purchaser pays for in installments, i.e., adding to the interpolated terminal reserve a proportionate part of the premium paid since the last contract anniversary, the date on which terminal reserve was calculated.  *822 *819  The first sentence of article 19(9) seems to contemplate the simultaneous acquisition and gift of the contract.  In the present case, however, since considerable time elapsed after the contracts in question were acquired, the sale price of the contracts affords no proper test of their value on June 11, 1936.  The record clearly shows that the contracts were not comparable to those being sold currently on July 1, 1936, or on June 11, 1936, and that comparable contracts could not have been obtained.  The changes in interest rate and loading charge, the enlargement of the contractual rights of the purchaser and the beneficiary, the lapse of time (as contemplated by article 19(9)) and the numerical increase of guaranteed refund payments were factors of procurable contracts which differentiated them unmistakably from the contracts under consideration.  The facts in the case at bar seem to bring it clearly within the principle underlying the final method outlined in the cited regulation.  Here no future payments of premium were to be made, the entire premium or purchase price having been made in one lump sum.  Therefore, no correction in amount need be made for installment*823  premiums.  The interpolated terminal reserve is based on the company's experience in dealing with similar annuity contracts and certainly is more nearly an index of the true value of the contract than any data which could be submitted from the annuitant's viewpoint.  We are of the opinion that the regulation affords a fair measure of evaluating the contracts and comprehends, in its effect, the various elements of value requisite to the proper determination thereof.  The interpolated terminal reserves were found to aggregate $182,653.56, and this sum, therefore, represents the correct valuation of the contracts at the time of gift.  The recent cases of , and , cited by both the petitioner and the respondent, do not control the issue before us.  In those cases, both involving single premium life insurance policies and not annuities, the Court held that the cash surrender value at the time of the gift did not determine their correct value.  In the Guggenheim case (in which the gift was made at substantially the same time as the purchase) the value was fixed by the*824  cost of the policies to the donor and in the Ryerson case by the cost of similar policies at the time of gift.  The Court further stated that "all of the economic benefits of a policy must be taken into consideration in determining its value for gift-tax purposes." Here, as we have seen, the gifts were made a considerable time after the purchase and no comparable contracts were obtainable at the time of gift.  The remaining issue relates to the number of exclusions of $5,000 to which the petitioner was entitled.  The petitioner contends that *820  he may claim an exclusion of $5,000 for each of the donees.  This question has been settled by the United States Supreme Court in , in which it was held that the donor was entitled to an exclusion of $5,000 for each beneficiary, provided the gift is not of a "future interest." It is the contention of the respondent that the gifts here in question were of future interests, particular attention being directed to the fact that the beneficiaries were not entitled to the receipt of income from the trust unless in being on the date appointed for its distribution. *825  The trust agreement provided that income payments should be made "upon the dates determined by Trustee to be convenient and practicable but at least annually" (if any net income were distributable).  There was no provision for accumulations of any sort except as income may be collected, allocated, and distributed during the current year.  As a practical matter it would be impossible to distribute each dollar of income as it is received.  Taxes and other charges must be paid before net income can be determined.  The important provision is that income must be paid within the year.  See . The trustee was not directed to accumulated income as in , but was compelled to distribute it annually.  In the Pelzer case the beneficiaries had no right to the present enjoyment of either the corpus or the income and would never receive any part of either unless they should survive a ten-year period.  See ; certiorari denied, U.S. ; *826 ; . See also , and cases there cited and discussed. In , the trustee had the absolute discretion to change the amounts to be paid to each beneficiary and thus cause their interests to be so variable that they had no certain, determinable value on the date of gift.  Here, the shares of each beneficiary were precisely fixed.  There was no possibility of a change in their amount.  We see no merit in the respondent's argument that because the trust instrument prohibited distribution to a beneficiary "unless in being" future interests were created.  Obviously, a recipient of income to be earned in the future must exist or he does not receive.  The words "unless in being" do not convert the interests here created into "future interests" and the exclusion of $5,000 for each beneficiary is accordingly allowed.  Decision will be entered under Rule 50.Footnotes*. Converted from 1934 contracts at old rates. ↩1. ART. 19.  Valuation of property. - * * * * * * (9) Life insurance and annuity contracts.↩ - The value of a life insurance contract or of a contract for the payment of an annuity issued by a company regularly engaged in the selling of contracts of that character is established through the sale of the particular contract by the company; or through the sale by the company of comparable contracts.  As valuation through sale of comparable contracts is not readily ascertainable when the gift is of a contract which has been in force for some time and on which further premium payments are to be made, the value may be approximated, unless because of the unusual nature of the contract such approximation is not reasonably close to the full value, by adding to the interpolated terminal reserve at the date of the gift the proportionate part of the gross premium last paid before the date of the gift which covers the period extending beyond that date.