*226 Decision will be entered under Rule 50.
1. Held, that by relinquishment of exclusive dominion and control and power of recapture for her own benefit and purposes, a donor, on January 10, 1936, made taxable gifts of the entire trust estate, including the shares given to the trust by two beneficiaries, and accumulated trust income.
2. Held, further, donor is not entitled to the benefits of section 501 (c) of the Revenue Act of 1932 as amended.
3. Held, further, the gifts made were gifts of future interests and donor is not entitled to five exclusions of $ 5,000 each.
*566 The respondent determined a deficiency of $ 11,984.04 in the gift tax liability of Ethel K. Childers for the year 1936. Ethel K. Childers died on June 23, 1946, and the executors were duly substituted as the petitioner.
The issues are:
(1) Whether an amendment*228 dated January 10, 1936, to the trust agreement of May 16, 1932, executed by the decedent, served to effect completed gifts in trust, subject to the gift tax;
(2) If so, whether gifts made to the trust by a sister and a sister-in-law of the decedent in 1933 and 1934, respectively, are includible in the total amount of gifts made by decedent on January 10, 1936; and
(3) Whether the total amount of income funds of the trust accumulated on January 10, 1946, is includible in the total amount of decedent's taxable gifts.
(4) The Commissioner, in his amended answer, alleged that he erred in allowing five exclusions of $ 5,000 each in determining the amount subject to gift tax in 1936 and he seeks an additional deficiency of $ 3,187.51 accordingly.
FINDINGS OF FACT.
The facts were stipulated. Those pertinent to the issues are as follows:
Ethel K. Childers was born October 27, 1887, and died June 23, 1946. Prior to 1932 and up to and including June 23, 1946, she lived at Arkansas City, Kansas. On the date of her death, she was secretary and general counsel of the Kanotex Refining Co., Arkansas City, Kansas.
*567 On May 16, 1932, Ethel K. Childers had two adopted children, Robert L. *229 Childers, born July 13, 1922, and Dorothy Childers, born May 24, 1924. On the same date Mrs. Childers had two sisters, Bertha K. Hulser, born April 7, 1885, and Edith K. Mahaffey, born July 21, 1892, and one brother, Winfield S. Kehrer, born July 16, 1880. Matie B. Kehrer, the wife of Winfield S. Kehrer, was born about 1885 and died August 20, 1935.
On May 16, 1932, Ethel K. Childers (a single woman), as donor, executed a trust agreement, naming herself and Robert R. Cox, of Arkansas City, Kansas, as trustees. On the same day Ethel K. Childers, in accordance with the terms of the trust agreement, transferred to herself and Robert R. Cox, as trustees under the trust agreement, 799 shares of stock in the Silverdale Gravel Co. Prior to January 10, 1936, such shares were exchanged for 1,096 shares of stock in Crude Oil Pipe Line Co., the value of which on January 10, 1936, was $ 10,960.
The trust agreement provided, among other things, that all of the net income received from May 16 to December 31, 1932, inclusive, should be divided equally among and paid to the five designated beneficiaries, viz., Robert L. Childers, Dorothy Childers, Matie B. Kehrer, Bertha K. Hulser, and Edith *230 K. Mahaffey, and that all the net income received after December 31, 1932, should be divided and paid one-half to the donor during her lifetime and one-fifth of the net income not paid to donor to each of the above named five beneficiaries. In the event such beneficiaries, except Matie B. Kehrer, predeceased the donor, the share of the income payable to each was to become a part of the corpus of the trust, the share of Matie B. Kehrer being payable to Winfield S. Kehrer. If any of such beneficiaries, except Edith K. Mahaffey, survived the donor but died before final distribution of the trust estate, his or her portion was payable to his or her lawful issue, if any, and if none, the portion was to become a part of the corpus. In the event of the death of Edith K. Mahaffey after the death of donor but before final distribution of the trust estate, her portion of the income was to become a part of the corpus of the trust. Clauses (c) and (d) of paragraph second of the trust agreement provided as follows:
(c) During the lifetime of the donor, the Trustees may, in their sole discretion, pay to any beneficiary only part of his or her income, the balance to be held and accumulated by *231 the Trustees for future distribution to such beneficiary; the amount to be paid, and the time when such accumulated income is to be distributed to the beneficiary to be determined solely by the Trustees. Each income fund shall be kept separately in the accounts of the Trustees, as though a separate trust were created for each beneficiary, and on the death of an income beneficiary the accumulated income of his or her fund shall become part of the principal of the Trust Estate. The provisions of this paragraph shall apply to all income realized by this Trust, whether received during the calendar year 1932 or subsequent thereto.
(d) In case the Net Income from the Trust Estate allotted for the benefit of *568 any beneficiary hereunder is at any time or times insufficient, in the opinion of the Trustees, for the comfort, maintenance and/or education of such beneficiary, the Trustees may pay out from time to time such sums from the principal as in their sole discretion may be necessary for such purpose or purposes.
The trust was to terminate upon the death of the donor and the entire corpus and accumulated income, "regardless for what accounts the same are held," were to be divided*232 into five equal parts and distributed to Robert L. Childers, Dorothy Childers, Matie B. Kehrer, if living; otherwise to Winfield S. Kehrer, Bertha K. Hulser and Edith K. Mahaffey, or their lawful issue.
In paragraph fourth (c), the trustees were given power to invest the trust estate in designated investments:
* * * provided, however, that during the lifetime of the Donor the Trustees may invest and reinvest the Trust Estate, or any part thereof, in the unsecured notes of any individual approved by the Trustee E. K. Childers, or in the unsecured notes or bonds of any corporation, firm or syndicate in which the Trustee E. K. Childers is at the time a stockholder, partner or member, if approved by the Donor, and the Trustees shall not be liable for any loss resulting to the Trust Estate from, or on account of, any such investments so approved by the Donor.
In addition to other powers, the trustees were empowered, in clause (e) of paragraph fourth, to determine:
* * * the mode in which expenses are to be borne as between capital and income, and may determine which moneys or property are to be treated as capital or income, which right shall include the power to determine whether any part*233 of the actual income of any investment purchased at a premium or discount shall be treated as capital or income.
The trust agreement provided further as follows:
Fifth: (a) Said E. K. Childers, as Trustee hereunder, may make any and all investments of the Trust Estate in her sole discretion, shall have the custody of all securities, funds and other property of the Trust Estate and shall make all payments and distributions provided hereunder, while she is such Trustee.
(b) In all matters wherein any discretion is granted the Trustees under this Agreement, the decision of the Trustee E. K. Childers shall be conclusive and binding upon both Trustees, and on all beneficiaries hereunder.
(c) [Provided for successor trustees.]
Sixth: This agreement, and the Trust hereby created, may be altered, amended, and/or revoked, in whole or in part, at any time, and from time to time, by a written instrument signed by the Donor and one other beneficiary hereinabove named then sui juris, and in the event of the complete revocation thereof in the manner hereinabove set forth the entire corpus, and all other property or money of the Trust Estate, including all accumulated income, then in the hands, *234 or under the control, of the Trustees shall be transferred and delivered to the Donor, and no beneficiary other than the Donor shall have any right, title or interest therein or thereunder, or to any part thereof.
On June 11, 1932, by an instrument in writing executed by E. K. Childers, donor, "by and with the consent of, and in conjunction with the undersigned Matie B. Kehrer, one of the beneficiaries named *569 in the Trust Agreement" of May 16, 1932, paragraph sixth of the trust agreement was amended to read as follows:
Sixth: This agreement, and the Trust hereby created, may be altered, amended, and/or revoked, in whole or in part, at any time, and from time to time, by the Donor, in conjunction with any other beneficiary hereinabove named then sui juris and having a substantial adverse interest in the disposition of the corpus of this Trust Agreement, or the income therefrom, which alteration, amendment or revocation shall be evidenced by a written instrument signed by the Donor and such other above-described beneficiary, and in the event of a complete revocation thereof in the manner hereinabove set forth the entire corpus, and all accumulated income, and all other property*235 or money of the Trust Estate then in the hands, or under the control, of the Trustees shall be transferred and delivered to the Donor, and no beneficiary other than the Donor shall have any right, title or interest therein or thereunder, or to any part thereof.
On January 8, 1933, the trust agreement was amended so as to reduce the participation of the donor, E. K. Childers, in the net income of the trust from one-half to one-tenth thereof and to change one of the successor trustees.
On November 15, 1933, Bertha K. Hulser transferred to Ethel K. Childers and Robert R. Cox, as trustees under the trust agreement, 400 shares of stock of the Kanotex Refining Co., which thereupon became a part of the corpus of the trust. Such shares had a value on January 10, 1936, of $ 14,000. On November 15, 1933, Matie B. Kehrer transferred to Ethel K. Childers and Robert R. Cox, as trustees under the trust agreement, 700 shares of stock of the Kanotex Refining Co., which thereupon became a part of the corpus of the trust. Such shares had a value on January 10, 1936, of $ 24,500. On February 15, 1934, Matie B. Kehrer transferred to Ethel K. Childers and Robert R. Cox, as trustees under the trust*236 agreement, 244 3/4 shares of stock of the Kanotex Refining Co., which thereupon became a part of the corpus of the trust. Such stock had a value on January 10, 1936, of $ 8,566.25.
On February 24, 1934, Ethel K. Childers transferred to herself and Robert R. Cox, as trustees under the trust agreement, additional shares of stock, which thereupon became a part of the corpus of the trust. The following is a list of the shares and their value as of January 10, 1936:
| 40 shares, American Smelting & Refining Co | $ 2,465.00 |
| 270 shares, American Steel Foundries | 6,952.50 |
| 40 shares, Atchison, Topeka & Santa Fe Railroad | 2,725.00 |
| 100 shares, Consolidated Oil | 1,200.00 |
| 20 shares, New York Central Railroad | 595.00 |
| 50 shares, Bethlehem Steel Co | 2,687.50 |
| Total | 16,625.00 |
On September 5, 1935, Ethel K. Childers, as donor, and Winfield S. *570 Kehrer, as beneficiary, executed an instrument in writing amending the trust agreement, which amendment was occasioned by the death of Matie B. Kehrer, and provided that:
Instead of paying to said Winfield S. Kehrer one-fifth of all net income not paid to said E. K. Childers, accruing from the principal of said Trust Estate for the period*237 from August 30, 1935, to and including December 31, 1935, such portion for such period shall be paid as follows, to-wit: To Kenneth Kehrer, Six Hundred Fifty Dollars ($ 650.00); to Willard S. Kehrer Six Hundred Fifty Dollars ($ 650.00); to said Winfield S. Kehrer the remainder thereof.
On January 10, 1936, Ethel K. Childers, as donor, and Edith K. Mahaffey, Bertha K. Hulser, and Winfield S. Kehrer, as beneficiaries, executed an indenture, altering and amending the trust agreement of May 16, 1932. Such indenture provided, among other things, that the trust agreement of May 16, 1932, should thereafter be designated as the senior trust and that the net income therefrom received by the trustees after December 31, 1935, and prior to January 1, 1939, not, however, beyond the life of the donor, should be paid one-tenth thereof to the donor and one-fifth of all the net income not paid to the donor should be paid to each of five separate trusts to be known as "Junior Trust A," "B," "C," "D," and "E," and:
In the event of successors to said E. K. Childers and Robert R. Cox, or either of them, payment shall be made to such successors. Distribution shall be considered to have been made whenever*238 such distribution shall have been credited on the books of said Senior Trust to the respective accounts of such Junior Trusts, or whenever paid as distribution, whichever is earlier; and the Trustees of such respective Junior Trusts may demand payment thereof whenever so credited.
Clause (d) of paragraph second was revoked and as to clause (c) of the same paragraph, the indenture provided that:
* * * clause (c) of said paragraph Second shall apply to each and every of said Junior Trusts (A B C D and E), the same as to other beneficiaries, and wherever in said clause (c) there appear the words "his or her" they shall be construed to refer to said Junior Trusts as beneficiaries, as well as to individual beneficiaries; provided, that the following language therein, towit, "on the death of an income beneficiary the accumulated income of his or her fund shall become part of the principal of the Trust Estate", shall not be applicable to any of said Junior Trusts as beneficiaries.
Paragraph third, relating to the termination of the trust upon the death of the donor was amended to read as follows:
Third: Upon the death of the Donor this Trust shall terminate, except as hereinafter otherwise*239 provided, and upon such termination all accumulated income then held by the Trustees of said Senior Trust for the account of said Junior Trusts (A B C D and E) or any of them shall be distributed to them; and the entire corpus and all other accumulated income then in the hands of the Trustees (of the Senior Trust), regardless for what accounts the same are held, shall be divided into five (5) equal parts or portions and the same shall be transferred, paid over and delivered as follows:
*571 (a) 1. One part or portion to said Robert L. Childers, son of Donor, if living;
2. One part or portion to said Dorothy Childers, daughter of Donor, if living;
3. One part or portion to the said Winfield S. Kehrer, brother of Donor, if living, otherwise to his sons and daughters, Ruth, Kenneth, Willard and Ethelyn, or the survivors of them living at the time of the death of Donor, in equal shares;
4. One part or portion to the said Bertha K. Hulser, sister of Donor, if living, otherwise to her daughters Myra and Lois or the survivor of them at the time of the death of Donor;
5. One part or portion to the said Edith K. Mahaffey, sister of Donor, if living;
(b) Should said Robert L. Childers, *240 son of Donor, not survive Donor, or survive Donor but die before distribution to him of his portion of the Trust Estate, his portion of the Trust Estate and accumulated income (or any undistributed part thereof should he die during distribution) shall be added to the shares or portions of the surviving beneficiaries hereunder, in the relative proportions in which they, respectively, shall otherwise, at the time of such distribution, be entitled to participate in the distribution of the corpus of the Trust Estate.
Provisions similar to those contained in clause (b) above were made in clauses (c), (d), (e) and (f), relating to the interests of the other beneficiaries, Dorothy Childers, Winfield S. Kehrer, Bertha K. Hulser, and Edith K. Mahaffey. Clause (g) provided as follows:
(g) If none of said above named beneficiaries shall be living at the time of distribution hereunder, the shares, parts or portions which they would have received if living, shall be transferred, paid over and delivered to The Principia, a non-profit Missouri corporation, of St. Louis, Missouri.
Provided, However, That if at the time of the termination of this Trust any beneficiary entitled to any portion of the*241 Trust Estate upon distribution thereof be under twenty-five years of age, this Trust shall continue as to the portion of the Trust Estate of such beneficiary until he or she arrives at the age of twenty-five years, at which time his or her portion of the Trust Estate shall be transferred, paid over and delivered to him or her, as the case may be.
Clause (c) of paragraph fourth was amended to read as follows:
(c) The Trustees shall from time to time as they deem advisable invest and reinvest the Trust Estate in any of the securities of the United States of America, or of any of the instrumentalities or States thereof, or of any County or incorporated city, or in first mortgages on real estate, or in notes or bonds secured by such first mortgages, in the stocks or bonds of any incorporated Company in the United States, or in farm lands, or oil and gas leases, lands and properties, including pipelines and pipe line systems, as to the Trustees of such Trust shall deem best for the said Trust, or in any type of investment authorized for Trust funds by the laws of the State of Kansas in force at the time of such investment, with power to vary the investments of the said Trust from time *242 to time in the discretion of the Trustees for any others of the character above specified. It is provided, however, that after the death of the Donor, the investment and reinvestment of such funds shall be restricted and confined to such first mortgages on real estate (restricted to fifty per cent of the market value of the property mortgaged and not to exceed the assessed value thereof for taxation purposes), securities of the United States of America, or of any of the instrumentalities or States thereof, or of any county, incorporated city or other political subdivision, or in conservative, interest-paying or dividend paying stocks or bonds listed on the New York Stock Exchange or New Cork [sic] Curb (but no more than twenty per cent of the Trust Estate shall be invested in common stocks at any one time), *572 or in any type of investment authorized for trust funds by the laws of the State of New York in force at the time of investment; provided, further, that the Trustees may retain such investments as may have been made during the life of Donor, and all property of every kind or character donated or transferred by Donor to the Trustees. (Said Trustees may make and hold*243 the investments of the accumulated income of the respective beneficiaries hereunder, in divided, or undivided interests, in any type of investment suitable for the corpus. All Kanotex Refining Company stock and all Crude Oil Pipeline Company stocks held by the Trustees on January 10, 1936, in accumulated income funds or accounts shall be transferred to and hereupon become a part of the corpus of the Senior Trust Estate.) The Trustees shall not be required to keep all moneys invested at all times, but shall use their discretion in this regard. The Trustees shall have the right to move and remove the situs of the Trust Estate to any place within the United States of America.
Clauses (a) and (b) of paragraph fifth were revoked.
Paragraph sixth was amended to read as follows:
This agreement and the Trust hereby created, may be altered, amended, and/or revoked, in whole or in part, at any time, and from time to time, by the Donor, in conjunction with any other individual (but not Trustee) beneficiary hereinabove named then sui juris and having a substantial adverse interest in the disposition of such part of the corpus of the Trust Estate, or the income therefrom, which alteration, *244 amendment or revocation shall be evidenced by a written instrument signed by the Donor and such other above-described beneficiary.
Amendment VII of the indenture is as follows:
1. Junior Trust A: Whereas, Provision has been made in the within and foregoing instrument for the distribution of a portion of the income of the above described Senior Trust to E. K. Childers and Robert R. Cox, as Trustees of Junior Trust A, it is hereby provided that said income shall be held and administered by said Trustees in a separate and distinct income trust, the terms and provisions of which are fully set out in the memorandum attached hereto and made part hereof and designated "Junior Trust A", which memorandum is added to and made a part hereof, and incorporated herein as fully as though written herein in full.
Similar provisions were made relating to junior trusts B, C, D, and E.
The memorandum incorporated in the indenture and designated "Junior Trust A" provides in part as follows:
Whereas, Provision has been made in the foregoing instrument for the distribution of a portion of the income of the E. K. Childers Trust to the Junior Trust A, there is hereby created and constituted a Trust, separate*245 and distinct from said Senior Trust, or any other Junior Trust, which shall be known as Junior Trust A, and there are hereby appointed as Trustees thereof E. K. Childers and Robert R. Cox. The Trustees shall hold and administer all income and property of said Junior Trust A, and all other property which may from time to time be added thereto, in trust for the uses and purposes, and upon the terms and conditions, hereinafter set forth, to-wit:
First: Out of the income derived by the Trustees of said Junior Trust A from said E. K. Childers Trust (hereinafter referred to as the Senior Trust), or any other property or income at any time comprising or coming into this Junior Trust A, said Trustees of this Junior Trust A shall first pay all the necessary costs and expenses of this Junior Trust A, including their own reasonable compensation, *573 and the rest of the income (hereinafter called Net Income) shall be paid to the beneficiary or beneficiaries from time to time entitled to receive the same, in monthly or quarterly installments, or in such other installments as the Trustees of this Junior Trust A may from time to time determine. During the lifetime of the said E. K. Childers*246 the Trustees of Junior Trust A shall render to her, and after her death to each beneficiary receiving income hereunder, semi-annual statements of account showing the condition of the Junior Trust A and all property held by the Trustees thereof.
Second: The Trustees of Junior Trust A shall pay the Net Income of said Junior Trust A as follows:
(a) One-fifth thereof to Robert L. Childers, son of the Donor E. K. Childers. In the event of his death prior to the termination of this Junior Trust A and final distribution of such income hereunder, such income, and all increment thereof and income therefrom shall be paid to the within named Winfield S. Kehrer, Bertha K. Hulser and Edith K. Mahaffey, in equal shares, or the survivors or survivor of them.
[Similar provisions related to the one-fifth share of each of the other beneficiaries, Dorothy Childers, Winfield S. Kehrer, Bertha K. Hulser, and Edith K. Mahaffey.]
(b) During the lifetime of the Donor, the Trustees of the Junior Trust A may, in their sole discretion, pay to any beneficiary only part of his or her income, the balance to be held and accumulated by such Trustees for future distribution to such beneficiary; the amount to be *247 paid, and the time when such accumulated income is to be distributed to the beneficiary to be determined by such Trustees. Distribution shall be considered to have been made when paid as such distribution, or whenever the beneficiary shall have been personally credited with such distribution upon the books of the Trustees, and any beneficiary shall have the right to demand payment of any such distribution so credited to his account.
(c) During the minority of any beneficiary entitled to receive income under the provisions of this Junior Trust A, payment of such income, or any part thereof, to the beneficiary may, in the sole discretion of the Trustees of this Junior Trust A, be paid over to a parent of such beneficiary (excepting, however, the natural parent of any adopted child, and excluding the Donor), for the use and benefit of such beneficiary, nor shall such Trustees, nor either of them, be required to see to the application of any moneys so paid to such parent. It is not the intention of the Donor to provide for the education, maintenance or support of any beneficiary hereunder.
Third: Upon the death of the Donor this Junior Trust A shall terminate, and upon such termination*248 the entire Junior Trust A Estate and all accumulated income therefrom in the hands of the Trustees of this Junior Trust A shall be transferred, paid over and delivered to the beneficiaries entitled to receive the same. In the event of the death of all of the afore-named Winfield S. Kehrer, Bertha K. Hulser and Edith K. Mahaffey, prior to the termination of this Junior Trust A, and final distribution hereunder, the income, shares, parts or portions which they would have received hereunder if living shall be paid over and delivered to The Principia, a non-profit Missouri corporation, of St. Louis, Missouri. Provided, however, that if at the time of the termination of this Junior Trust A, any beneficiary entitled to any portion of the Trust Estate thereof, or income therefrom, on distribution thereof, be under twenty-five years of age, such beneficiary's portion of any such distribution shall be paid over and delivered to the Trustees of said Senior Trust, to be held and administered by them under the terms and conditions provided in said Senior Trust for the handling and distribution of shares of beneficiaries under twenty-five years of *574 age. It is not intended hereby that*249 any portions of any such minor beneficiaries, or the income therefrom, shall revert to or become merged with said Senior Trust, but that they shall be handled, administered and distributed by the same Trustees and under the same terms and provisions as provided in said Senior Trust for the portions of like beneficiaries under said Senior Trust.
Fourth: (a) Each and every payment, transfer, delivery or conveyance, of principal or income, to be made hereunder by the Trustees of this Junior Trust A shall be made to such beneficiary in person, and no payment, transfer, delivery or conveyance shall be made upon any order of or by any such beneficiary, or upon any assignment or transfer by such beneficiary or by operation of law, except that said Trustees may recognize and honor any assignment made by a beneficiary, of such beneficiary's portion of the income, with the approval of the Donor.
* * * *
The provisions of the five junior trusts were identical.
In addition to the shares of stock transferred to the trustees by Ethel K. Childers, Bertha K. Hulser, and Matie B. Kehrer, as set forth heretofore, the corpus of the trust on January 10, 1936, included 70 shares of stock of Kanotex Refining*250 Co. which had been purchased by the trustees with trust funds and have a value on January 10, 1936, of $ 2,450, and cash in bank in the amount of $ 191.72. On January 10, 1936, there were also in the hands of the trustees accumulated income funds invested in stocks of various corporations having a total value on said date of $ 125,228.99.
The net income of the trust for the calendar year 1936 was $ 153,404.44. The following distributions were made to the beneficiaries during 1936:
| To -- | |||
| From -- | |||
| Dorothy | Robert | Edith K. | |
| Childers | Childers | Mahaffey | |
| Dorothy Childers -- accumulated | |||
| income fund | $ 3,000 | ||
| Robert Childers -- accumulated | |||
| income fund | $ 3,000 | ||
| Edith K. Mahaffey -- accumulated | |||
| income fund | $ 7,000 | ||
| Bertha K. Hulser -- accumulated | |||
| income fund | |||
| Junior Trust A | 1,000 | ||
| B | 1,000 | ||
| C | 1,000 | ||
| D | 1,000 | ||
| E | 1,000 | ||
| Total | 3,000 | 3,000 | 12,000 |
| To -- | |||
| From | |||
| Bertha K. | Winfield | ||
| Hulser | S. Kehrer | Total | |
| Dorothy Childers -- accumulated | |||
| income fund | |||
| Robert Childers -- accumulated | |||
| income fund | |||
| Edith K. Mahaffey -- accumulated | |||
| income fund | |||
| Bertha K. Hulser -- accumulated | |||
| income fund | $ 7,500 | ||
| Junior Trust A | $ 1,800 | ||
| B | 1,800 | ||
| C | 1,800 | ||
| D | 1,800 | ||
| E | 1,800 | ||
| 7,500 | 9,000 | $ 34,500 |
*251 On or about December 21, 1943, pursuant to the request of the Commissioner of Internal Revenue, Ethel K. Childers filed a gift tax return for the calendar year 1936, disclaiming that she had made any taxable gifts during that year and disclaiming any gift tax liability for that year.
*575 The Commissioner determined that Ethel K. Childers made taxable gifts in 1936 of the following:
| Holdings of E. K. Childers Trusts (Jan. 10, 1936) | |
| Gifts by E. K. Childers | $ 27,585.00 |
| Stocks purchased by corpus | 2,450.00 |
| Gift by Bertha Hulser | 14,000.00 |
| Gifts by Matie B. Kehrer | 33,066.25 |
| Cash in bank | 191.72 |
| Accumulated income funds | 125,228.99 |
| Total | 202,521.96 |
Ethel K. Childers herein is the same person as Ethel K. Childers and E. K. Childers in the proceeding reported at 39 B. T. A. 904, and 110 Fed. (2d) 934.
OPINION.
The question to be determined is whether Ethel K. Childers, by the amendment on January 10, 1936, of the trust indenture of May 16, 1932, made a taxable gift of the entire trust estate.
The petitioners admit that the powers retained by the donor prior to January 10, 1936, subjected her to liability for income*252 tax on the trust income, as determined in Ethel K. Childers, 39 B. T. A. 904; affirmed sub nom. Cox v. Commissioner (C. C. A., 10th Cir.), 110 Fed. (2d) 934; certiorari denied, 311 U.S. 667">311 U.S. 667. They likewise admit that under the doctrine of Sanford's Estate v. Commissioner, 308 U.S. 39">308 U.S. 39, "The relinquishment of these controls might constitute a taxable gift." They argue, however, that subsequent to the decision in the Sanford case, Congress, by the enactment of section 502 (b) of the Revenue Act of 1943 and amendment thereof by Joint Resolution of June 29, 1945, 1*576 rendered the relinquishment of powers of administration and right to change any beneficial interest in trust corpus or income nontaxable.
*253 Paragraph sixth in the original trust agreement provided that the donor could alter, amend, or revoke the trust in whole or in part at any time by a written instrument signed by her "and one other beneficiary hereinabove named then sui juris." That provision was amended June 11, 1932, with the consent of Matie B. Kehrer, one of the beneficiaries, so that thereafter the trust agreement could be amended or revoked in whole or in part, at any time, and from time to time, by the donor "in conjunction with any other beneficiary hereinabove named then sui juris and having a substantial adverse interest in the disposition of the corpus of this Trust Agreement, or the income therefrom." On January 10, 1936, that provision was again amended. Thereafter the trust agreement could be amended or revoked by the donor "in conjunction with any other individual (but not Trustee) beneficiary hereinabove named then sui juris and having a substantial adverse interest in the disposition of such part of the corpus of the Trust Estate, or the income therefrom."
The respondent does not contend that the interest of any of the beneficiaries other than the donor is not substantial and adverse. He *254 contends that the amendment of the trust agreement on January 10, 1936, effected a transfer of property taxable as a gift because, in addition to other rights and powers relinquished, the donor also released her right to change any beneficial interest in the trust corpus or income except with the consent of the beneficiary whose interest she might wish to change.
The question to be determined is not, therefore, whether the donor's right of revocation was limited by the required concurrence of a person having a substantial adverse interest, as it was in Estate of Leon M. Gillette, 7 T. C. 219, cited by petitioner. The question is whether the rights and powers retained by the donor in the trust estate were such as to make the transfer in trust in 1932 incomplete until such rights and powers were released by her on January 10, 1936.
In Ethel K. Childers, supra, which involved the same original trust prior to the amendment of January 10, 1936, it was held that the income of the trust for 1934 was taxable to the donor under section 167 of the Revenue Act of 1934. Upon appeal, the Circuit Court for the Tenth Circuit held that*255 the power to revest in the grantor title to the whole of the corpus was vested in the donor under the trust instrument and that therefore the whole income of the trust was taxable to her under section 166 of the Revenue Act of 1934. The Circuit Court further held that the trust income was taxable to the donor under section 22 (a) of the same act. The above decisions are not conclusive here, as argued by respondent. It does not follow *577 that because income of a trust is taxable to the grantor the transfer in trust as to either corpus or income is incomplete for gift tax purposes. "The two taxes are not that closely integrated." James A. Hogle, 7 T. C. 986, 988; affd. (C. C. A., 10th Cir.), 165 Fed. (2d) 352.
Prior to its amendment January 10, 1936, the trust agreement provided that in all matters wherein any discretion was granted to the trustees (the donor and one other), the decision of the donor should be conclusive and binding upon both trustees and beneficiaries. Because of such provision it was within the exclusive power of the donor to pay to any beneficiary only part of his or her allotted share of the income, *256 and to accumulate the balance, which, upon the death of a beneficiary became a part of the trust corpus. The donor could likewise determine the amount and the time when the accumulated income was to be distributed to any beneficiary. It was within her power to pay out such sums from the principal for the comfort, maintenance, and/or education of any beneficiary, of which donor was one, as in her discretion was necessary for such purpose or purposes. The donor was given custody of the trust estate with power to make all investments, including investment in the unsecured note of any individual or firm in which donor was a stockholder, partner, or member, without incurring any liability for any loss resulting therefrom to the trust estate. The donor could determine the mode in which expenses were to be borne as between capital and income and which moneys or property were to be treated as capital or income. Upon termination of the trust the corpus and accumulated income, "regardless for what accounts the same are held," were to be divided into five equal parts and distributed to the beneficiaries, if living, or to his or her lawful issue. In the event of complete revocation, the*257 entire corpus and all other property or money of the trust, including all accumulated income, was to revert absolutely to the donor. As stated in Ethel K. Childers, supra, the donor could, while conforming to the terms of the trust agreement, "effectively exclude the other beneficiaries from participation whenever she should so determine." The donor could recapture the trust corpus and income by exercising her right to invest in her unsecured note without liability for any loss; could recapture the trust principal by using it for her own comfort and maintenance; and could change the portion allotted to each beneficiary by exercising her right to withhold and accumulate the income and use the principal for the comfort, maintenance, and education of any beneficiary.
In the Sanford case a trust was created in 1918 in which the grantor reserved to himself the power to terminate the trust in whole or in part or to modify it. In 1919 the grantor surrendered the power to revoke, but reserved the right to modify, but only to designate new *578 beneficiaries other than himself. In 1924, after the effective date of the gift tax statute of 1924, he *258 renounced his power to modify the trust. It was held that the relinquishment in 1924 of control over the disposition of the trust property completed the transfer in trust so as to subject it to the gift tax. In Rasquin v. Humphreys, 308 U.S. 54">308 U.S. 54, following the decision in the Sanford case, it was held that a reservation in a trust, created in August 1934, of power in the donor to designate new beneficiaries other than himself rendered the gift incomplete within the meaning of the gift tax statute of 1932 and not subject to the gift tax imposed thereby.
In Smith v. Shaughnessy, 318 U.S. 176">318 U.S. 176, it is stated:
The essence of a gift by trust is the abandonment of control over the property put in trust. The separable interests transferred are not gifts to the extent that power remains to revoke the trust or recapture the property represented by any of them, Burnet v. Guggenheim, supra [288 U.S. 280] or to modify the terms of the arrangement so as to make other disposition of the property, Sanford v. Commissioner, supra [308 U.S. 39].
A gift in trust is not complete until the*259 donor "cuts the strings by relinquishing his reserved powers" ( Higgins v. Commissioner (C. C. A., 1st Cir.), 129 Fed. (2d) 237; certiorari denied, 317 U.S. 658">317 U.S. 658) or "gives up dominion and control over the subject matter of the gift." Camelia I. H. Cerf, 1087">1 T. C. 1087, 1091; affd. (C. C. A., 3d Cir.), 141 Fed. (2d) 564. It is stated in Helvering v. Hutchings, 312 U.S. 393">312 U.S. 393, that:
The gift tax provisions are not concerned with mere transfers of legal title to the trustee without surrender by the donor of the economic benefits of ownership and his control over them. A gift to a trustee reserving to the donor the economic benefit of the trust or the power of its disposition, involves no taxable gift. It is only upon the surrender by the donor of the benefit or power reserved to himself that a taxable gift occurs. * * *
In Cerf v. Commissioner, supra, the husband of taxpayer in 1928 created four trusts. Each trust was for the benefit of the wife and one of their four children. The net income of each trust was payable to the *260 wife during her life "if she shall accept it." Income which had not been accepted by the wife at the time of her death was to be added to corpus. The husband reserved the right to amend or revoke the trusts only with the written consent of his wife and in conjunction with her as beneficiary. In June 1932 each trust was amended with the consent of the wife. The amendment required the trustees, upon written demand of the husband, to pay to him or his nominees or assigns all the income of the trusts. In August 1932 the trusts were again amended with the consent of the wife, giving the husband the right to amend or revoke any or all of the trusts at his pleasure and without his wife's consent. The court in its opinion stated, in part, as follows:
* * * The effect of the June amendments was that Camelia Cerf permitted her husband to assume full control over her right to receive the income from the trusts. *579 Thereafter it was he who would determine who was to get the income. * * * By completely abandoning her control over her income rights in the trusts during Louis Cerf's lifetime, Camelia Cerf effected a transfer thereof, Reinecke v. Northern Trust Company, supra, *261 Smith v. Shaughnessy, supra, taxable under § 501.
* * * *
The effect of the August amendments was to put Louis Cerf in a position where he could take back what he had once given Camelia Cerf. He had regained the control he had once relinquished and was for the purposes of the gift tax the owner, in fact if not in name. Thereafter he had it within his sole power to determine whether Camelia Cerf should or should not receive any income for the period by which her life expectancy exceeded his. This increment of power was effected by Camelia Cerf's deed in relinquishing the control which she previously had to veto any amendments to the trusts. Her abandonment of this control constituted a transfer of her remaining rights in the income of the trusts. The effect of the two amendments was to subject the taxpayer to a gift tax for the release of her equitable interests, as the Commissioner has asserted and the Tax Court affirmed. [1 T. C. 1087.]
Thus, in the instant case, because of powers and rights exercisable by the donor herein under the terms of the trust agreement, she was "for purposes of the gift tax the owner, in*262 fact if not in name," of the entire trust estate, including the securities donated by two beneficiaries and the accumulated income. As stated in the Sanford case, supra, the essence of a transfer under the gift tax statute "is the passage of control over the economic benefits of property rather than any technical changes in its title." Hence, the transfer was not complete until the donor on January 10, 1936, relinquished her powers of dominion and control over the trust property and income.
James A. Hogle, supra, cited by petitioners, does not support their position. While there are some similarities between that case and this, the determinative factors differ. The question there involved was whether the Commissioner erred in including in taxable gifts for 1936 to 1940, inclusive, the profits from trading on margin for the accounts of two trusts. The Commissioner argued that, since the income for 1934 through 1937 from marginal trading in the trusts' accounts was held taxable to taxpayer ( Hogle v. Commissioner (C. C. A., 10th Cir.), 132 Fed. (2d) 66), it followed that similar income for the years 1936 through*263 1940 must first have belonged to the taxpayer and been given by him to the trusts. This Court held that the profits from marginal trading were not includible in taxable gifts of Hogle because such profits, as they were realized, vested in the trusts and not in him, and that he could not make a transfer of them by gift. In support of its conclusion the Court specifically pointed out that:
* * * this is not a revocable trust in which the grantor, seeing a potential gain which he could capture for himself by revoking, may be said to have made a gift when he fails to revoke. Nor is it a trust where the grantor has retained the power to determine directly or indirectly which of two or more beneficiaries *580 may receive the income, and finally allowing it to go one way, might be said to have made a gift at that time.
Therein none of the income or principal of the trusts could ever revert to Hogle and he retained no right to alter, to amend, or to change the beneficial interests. The Circuit Court for the Tenth Circuit, in affirming the decision of this Court, stated in part as follows:
* * * Hogle never owned or held an economic interest in such income. * * * What, in fact *264 and in reality, Hogle gave to the trusts in the taxable years was his expert services in carrying on the trading, personal services in the management of the trusts. Hogle could give or withhold his personal services in carrying on trading on margin for the trusts. * * * There was no transfer directly or indirectly from Hogle to the trusts of title to, or other economic interest in, the income from trading on margin, having the quality of a gift. In short there was no transfer directly or indirectly by Hogle to the trust of property or property rights.
On the contrary, here the donor owned and held an economic interest in the trust estate. The donor, after transfer of property in trust, retained practically as absolute control of the trust estate as though no trust had been created. She continued in possession and control and distributed or withheld economic benefits as she determined. She could utilize and recapture the trust estate for her own purposes and benefit. She could and, on January 10, 1936, by the amendment of the trust instrument, did make an effective transfer of her economic interest in the trust estate having the quality of a gift.
In view of our conclusion, subsection*265 (c), inserted in section 501 of the Revenue Act of 1932 by section 502 (b) of the Revenue Act of 1943, is not applicable and the donor is not entitled to its benefit. The purpose of such subsection was to relieve from the gift tax the transfer or relinquishment of the power or control with respect to the distribution of trust property or income therefrom as involved in the Sanford and Humphreys cases, supra. S. Rept. No. 627, 78th Cong., 1st Sess. (1944 C. B. 993, 997, 1040-1). It was not intended and does not purport to relieve from the gift tax a grantor relinquishing the power to revest in himself title to the property transferred in trust or the income therefrom while a gift tax law is in effect. It specifically provides that if the power to revest title to property transferred in trust in the grantor is relinquished, while a law is in effect imposing a tax upon the transfer of property by gift, the subsection shall apply only if (1) gift tax was paid with respect to such transfer, or gift tax return was filed but no tax paid because of deductions and exclusions claimed, and (2) the grantor consents in accordance with regulations to treat*266 such transfer or relinquishment as having been a transfer subject to tax under the gift tax statute. It provides that the relinquishment by the grantor on or after June 7, 1932, and prior to January *581 1, 1940, of power or control with respect to the distribution of trust property or the income therefrom "shall not be deemed a transfer of property for the purpose of this title." It does not so provide as to the relinquishment of the power to revest title to such property in the grantor. Nor does it so provide as to the relinquishment of economic interests or control retained by the grantor. Such relinquishments are transfers of property taxable under the gift tax statute.
The remaining question, whether the Commissioner erred in allowing five statutory exclusions of $ 5,000 each, is dependent upon whether the 1936 gifts were gifts of "future interest" within the meaning of section 504 (b) of the Revenue Act of 1932 and as defined in article 11 of Regulations 79 (1936 Ed.).
The senior and junior trusts were to terminate upon the death of the donor, at which time the property thereof was to be distributed to designated beneficiaries, if living. The senior and junior trusts*267 provided that during the lifetime of the donor the trustees could, in their sole discretion, pay to any beneficiary only part of his or her income, the balance to be accumulated for future distribution, but the amount to be paid and the time of payment of such accumulated income were to be determined by the trustees. Obviously, none of the primary beneficiaries had the right to the present and immediate use, possession, or enjoyment of the corpus or income of the trusts. Hence, the gifts to them in trust as to corpus and income were gifts of future interests, and petitioner is not entitled to the five statutory exclusions of $ 5,000 each erroneously allowed by the respondent in determining the deficiency in gift taxes for 1936. Fondren v. Commissioner, 324 U.S. 18">324 U.S. 18; Commissioner v. Disston, 325 U.S. 442">325 U.S. 442; Alma M. Myer, 2 T. C. 291, 294; affirmed per curiam (C. C. A., 8th Cir.), 149 Fed. (2d) 642; Andrew Geller, 9 T.C. 484">9 T. C. 484.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 502. CERTAIN DISCRETIONARY TRUSTS IN CONNECTION WITH GIFT TAX.
* * * *
(b) Amendment of Revenue Act of 1932. -- Section 501 of the Revenue Act of 1932 (imposing a gift tax) is amended by inserting at the end thereof the following:
"(c) Certain Discretionary Trusts. -- In the case of property in a trust created prior to January 1, 1939, if on and after January 1, 1939, no power to revest title to such property in the grantor could be exercised either by the grantor alone, or by the grantor in conjunction with any other person not having a substantial adverse interest in the disposition of such property or the income therefrom, then a relinquishment by the grantor on or after June 7, 1932 and prior to January 1, 1940, of power or control with respect to the distribution of such property or the income therefrom by an exercise or other termination of such power or control shall not be deemed a transfer of property for the purposes of this title. If such property was transferred in trust, the grantor not retaining such power to revest title thereto in himself, or if such power to revest title to such property in the grantor was relinquished, while a law was in effect imposing a tax upon the transfer of property by gift, this subsection shall apply only if (1) gift tax was paid with respect to such transfer or relinquishment, and not credited or refunded, or a gift tax return was made within the time prescribed on account of such transfer or relinquishment but no gift tax was paid with respect to such transfer or relinquishment because of the deductions and exclusions claimed on such return, and (2) the grantor consents, in accordance with regulations prescribed by the Commissioner with the approval of the Secretary, for all purposes of this title to treat such transfer or relinquishment in the calendar year in which effected, and for all periods thereafter, as having been a transfer of property subject to tax under this title. This subsection shall not apply to any payment or other disposition of income occurring prior to the termination of power or control with respect to the future disposition of income from the trust property."↩