*270 Decision will be entered for the respondent.
Petitioner, on December 29, 1952, transferred land with a market value of $ 66,000 in trust. The trustees in their discretion were to pay to the petitioner the income for life in such amounts as would care for her reasonable needs. The undistributed income was to be added to the corpus. Upon petitioner's death the petitioner's four daughters were to share in the income and corpus. On the same day as the transfer in trust, the petitioner's four daughters executed $ 41,000 in non-interest-bearing demand notes payable to petitioner. The petitioner canceled, without consideration, the $ 41,000 in notes as follows: $ 12,000 on December 30, 1952, $ 12,000 on January 5, 1953, $ 12,000 on January 4, 1954, and $ 5,000 on January 5, 1955. Petitioner reported the above transaction as a gift of land in the amount of $ 42,000 and claimed the specific exemption of $ 30,000 and 4 exclusions of $ 3,000 each. Respondent determined a gift of $ 66,000 and disallowed the 4 exclusions. Held, for the respondent. The $ 66,000 valuation of the remainder interest is upheld because of a failure of proof. The petitioner's contention that the daughters*271 purchased their interest to the extent of the $ 41,000 in notes is rejected because, in substance, the transfer for the benefit of the daughters was a transfer of property by gift.
*730 The Commissioner has determined a deficiency in gift tax for the year 1952 in the amount of $ 3,060. The deficiency is due to the Commissioner's *731 determination that the total amount of gifts made by petitioner during 1952 was $ 66,000, rather than the $ 42,000 reported by petitioner, and that the 4 annual exclusions of $ 3,000 each*272 claimed by the petitioner are unallowable since the gifts sought to be excluded were of future interests.
By virtue of the pleadings the entire deficiency is in issue.
FINDINGS OF FACT.
Petitioner, Minnie E. Deal, is a resident citizen of Tuscaloosa, Alabama. On March 16, 1953, she filed a gift tax return with the district director of internal revenue at Birmingham, Alabama.
Prior to December 15, 1952, petitioner owned a 64 per cent undivided interest in 197.6 acres of land situated in and near the city of Tuscaloosa. The land was unimproved property. As the result of a legal action, the land was sold at public auction to the highest bidder on December 15, 1952, at the Tuscaloosa County courthouse. The petitioner was the highest bidder for the purchase of the land at the price of $ 66,000 and on the basis of her bid she was required to pay into court for distribution to the prior joint owner the sum of $ 23,760 (36 per cent of $ 66,000), plus the estimated expense of the court proceeding and public sale in the sum of $ 10,000. Her part of the cost was $ 4,146.28 and she later received a refund of $ 5,853.72 ($ 10,000 -$ 4,146.28). The total amount petitioner was required to *273 pay for the title to the land, exclusive of her own 64 per cent interest, and the expense of sale was $ 27,906.28 ($ 23,760 + $ 4,146.28).
In order to obtain the $ 33,760 which she paid into court, petitioner borrowed $ 33,760 from a local Tuscaloosa bank. She gave her individual promissory note to the bank for that amount. The note was payable on demand. Petitioner owned considerable property and was not required to give the bank a mortgage or to have comakers or securities on the note given the bank for the loan of $ 33,760.
On December 29, 1952, petitioner executed a trust agreement in which she appointed her three sons-in-law, namely, George R. Oliver, James K. Coleman, and Randolph G. Brown, as trustees. On December 30, 1952, petitioner, by warranty deed, conveyed the aforementioned 197.6 acres of land having a value of $ 66,000 to the trustees for the purposes expressed in the trust agreement.
The trust agreement gave the trustees broad powers and considerable discretion. It provided, inter alia, that the trustees should collect the income and pay the expenses; that the net income should be paid at least once a year to the settlor for her lifetime in such portions as*274 in the trustees' discretion would care for her reasonable needs, and that any undistributed portion should be added to the *732 corpus; that upon the settlor's death the net income should be divided into 4 equal shares and distributed to each of the settlor's daughters, Margaret Deal Coleman, Louise Deal Oliver, Evelyn Deal Brown, and Marie Deal Teague, in such portions as in the trustees' discretion should be reasonable or necessary for the beneficiaries' support and care; that the trustees should have discretion to invade the corpus if the net income was insufficient for the latter purpose; that the trustees, at any time after the death of the settlor, might divide the corpus in equal shares and distribute it, except that the share of Marie Teague should remain in trust until her death, her share should then be distributed among the other sisters or their heirs, per stirpes; that the trust should not terminate later than the death of Marie Teague; 1 that the trust was irrevocable except that it could be amended by agreement between the settlor and trustees; that full legal and equitable title to the trust property should be in the trustees; that the beneficiaries should only*275 have rights in proceeds; and that those rights were assignable. 2
On December 29, 1952, the petitioner's four daughters, who were named remainder beneficiaries in the aforementioned trust, executed 4 notes each, 3 for $ 3,000 each and 1 for $ 1,250, in the total amount of $ 10,250, and in the total amount for the four daughters of $ 41,000 ($ 10,250X4). These notes were made payable to petitioner and were executed at petitioner's request. They were non-interest-bearing demand notes. The daughters, except for Marie Teague, would have been able to pay the notes executed by them from their own and/or their husbands' properties. Marie Teague would only have been able to pay the notes over*276 a considerable period of time.
Petitioner, without consideration, forgave the aforementioned $ 41,000 in notes, as follows:
| Dec. 30, 1952 | $ 12,000 | (One $ 3,000 note of each daughter) |
| Jan. 5, 1953 | 12,000 | (One 3,000 note of each daughter) |
| Jan. 4, 1954 | 12,000 | (One 3,000 note of each daughter) |
| Jan. 5, 1955 | 5,000 | (One 1,250 note of each daughter) |
| 41,000 | (10,250 each daughter) |
The petitioner filed a gift tax return (Form 709) for the year 1952 which showed no net gifts and no tax due. Schedule A of the return showed the following: *733
| Schedule A -- Total Gifts During Year and Computation of Net Gifts | |||
| Item | Description of gift, and donee's | Date of gift | Value at |
| No. | name and address | date of gift | |
| 1 | 1 42/71 interest in 197.6 acres unimproved | ||
| rural lands located along Birmingham Highway, | |||
| located in Tuscaloosa County, Alabama, | |||
| in trust for Louise D. Oliver, Marie D. Teague, | |||
| Evelyn D. Brown, and Margaret D. Coleman | Dec. 29, 1952 | $ 42,000 | |
| (a) | Total gifts of donor | 42,000 | |
| * * * * | |||
| (f) | Less total exclusions not exceeding $ 3,000 for | ||
| each donee (except gifts of future interests) | 12,000 | ||
| (g) | Total included amount of gifts for year | 30,000 | |
| (h) | Deductions (see sections 13, 14, and 15 of | ||
| instructions): | |||
| * * * * | |||
| (3) | Specific exemption claimed | $ 30,000 | |
| (i) | Total deductions (total of lines 1, 2, and 3) | 30,000 | |
| (j) | Amount of net gifts for year (line g minus line i) | 0 |
The Commissioner determined a deficiency in gift tax for the year 1952. The determination was explained in the deficiency notice as follows:
| Taxable Year Ended December 31, 1952 | |||||
| Adjustments to Net Gifts. | |||||
| Schedule A of return | Return | Corrected | |||
| (a) Total gifts of donor | $ 42,000 | $ 66,000 | |||
| Less: Portion reported by spouse | 1 | 1 | |||
| Balance | 42,000 | 66,000 | |||
| Gifts of spouse to be included | 1 | 1 | |||
| Total gifts | 42,000 | 66,000 | |||
| (b) Less: Total exclusions | 12,000 | 1 | |||
| Total included amount of gifts | $ 30,000 | $ 66,000 | |||
| Deductions: | |||||
| Charitable | 1 | 1 | |||
| Marital deductions | 1 | 1 | |||
| Specific exemption | 30,000 | 30,000 | |||
| Total deductions | 30,000 | 30,000 | |||
| Net gifts | 1 | 36,000 |
Explanation of Adjustments
(a) It is determined that land in Tuscaloosa County made the subject of gifts by you in December 1952, had a value of $ 66,000.00 on the basic date, and that there was no consideration for the transfers in money or money's worth which would eliminate any part of this value for gift*278 tax purposes.
*734 (b) The gifts which you made in December, 1952, were so conditioned as to constitute future interests. It is, therefore, determined that no exclusion is allowable. Section 1003 of the Internal Revenue Code of 1939.
The petitioner had no intention to sell any interest or part of the property to her four daughters. Petitioner intended to and did make a gift of the remainder interest in the property to her four daughters in accordance with the terms of the trust indenture.
OPINION.
In controversy herein is the amount of petitioner's net gifts for the year 1952. The petitioner reported no net gifts and the respondent determined $ 36,000 in net gifts.
The salient facts can be summarized as follows:
The petitioner, the owner of an undivided 64 per cent interest in a tract of land, purchased the other 36 per cent on December 15, 1952. The value of the entire tract on that day was $ 66,000. The Commissioner has determined that to be the value of the land on that date and there is no evidence in the record to refute it. On December 29, 1952, petitioner transferred this property to her three sons-in-law in trust. The trust was irrevocable but petitioner could*279 amend it by agreement with the trustees. The trustees, who were given broad powers and considerable discretion, were to pay over the net income of the trust to the petitioner for her lifetime in such portions as in their discretion would care for her reasonable needs. Any undistributed portion of the net income was to be added to the corpus. It seems proper to remark here that the property was unimproved rural land located near Tuscaloosa, Alabama; and, so far as the record shows, it was not producing any income at the time the trust indenture was executed by petitioner. After the death of the petitioner the income was to be distributed in equal shares to her four daughters and at a later date the corpus was to be distributed to the daughters or their heirs. Simultaneously, her four daughters executed non-interest-bearing demand notes payable to the petitioner in the amount of $ 10,250 each (three $ 3,000 notes and one $ 1,250 note), a total of $ 41,000 for the four daughters. On December 30, 1952, the petitioner canceled, without consideration, one $ 3,000 note of each daughter; on January 5, 1953, petitioner canceled another $ 3,000 note of each daughter; on January 4, 1954, *280 petitioner canceled another $ 3,000 note of each daughter; and on January 5, 1955, petitioner canceled the final $ 1,250 note of each daughter.
Petitioner filed a gift tax return for 1952. The return showed one gift described as "42/71 Interest in 197.6 acres unimproved rural lands * * * in trust for [four daughters]" and valued the gift at $ 42,000. The petitioner claimed four $ 3,000 exclusions, or a total of $ 12,000, *735 and also claimed a deduction for the specific exemption in the amount of $ 30,000. The latter two amounts were deducted from the $ 42,000, leaving net gifts of zero. The respondent determined that the value of the total gifts during the year was $ 66,000. He allowed the specific exemption of $ 30,000, but disallowed the four $ 3,000 exclusions on the ground that the gifts sought to be excluded were of future interests. He, therefore, arrived at net gifts of $ 36,000 ($ 66,000 -- $ 30,000) and determined a deficiency accordingly.
We must first determine the value of the interest in the land conveyed in trust for the benefit of the four daughters.
The respondent determined that the value of the land conveyed for the benefit of the four daughters was *281 $ 66,000, which was the market value of the entire fee. No reduction was made for the life interest of the petitioner. Petitioner has made no contention that the value of the gift which respondent has determined to be $ 66,000 should be reduced because petitioner reserved to herself in the trust indenture an interest in the property during her lifetime. No evidence was introduced at the hearing regarding the value of petitioner's reserved interest and no mention of it is made on brief. Since the petitioner's interest is not an absolute right to the income for life but a right to the income "as in the trustees' discretion will care for her reasonable needs," 3 we would not be justified in determining the value of her interest by the tables contained in Regulations 108, sec. 86.19, as amended by T. D. 5902, 1952-1 C. B. 167. Accordingly, we hold, if for no other reason than a failure of proof, that the value of the remainder interest conveyed in trust for the benefit of petitioner's four daughters was $ 66,000 as determined by the respondent.
*282 We next must determine whether and to what extent the conveyance constituted a gift. The petitioner earnestly contends that the notes in the total amount of $ 41,000, given by the four daughters to the petitioner the same day that the trust indenture was executed, rendered the transaction a purchase to that extent by the daughters rather than a gift to them.
As stated previously, on December 29, 1952, the date of the trust agreement, the four daughters executed notes payable to the petitioner in the amount of $ 10,250 each, or a total of $ 41,000. The petitioner canceled, without consideration, the $ 41,000 in notes as follows: $ 12,000 on December 30, 1952 (the day following their execution); $ 12,000 on January 5, 1953 (within a week of execution); $ 12,000 on January 4, 1954; and $ 5,000 on January 5, 1955. The petitioner, however, testified that she requested the notes so that she would have *736 something to fall back on in the event the bank called the notes she gave to it in order to borrow the $ 33,760 for the purchase of the property, and contends that she would not have conveyed the land in trust unless the daughters executed the notes.
The statute taxes "the transfer*283 * * * of property by gift," sec. 1000 (a), I. R. C. 1939, 4 and "the tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect." Sec. 1000 (b). Also, see sec. 1002. In determining whether the conveyance in question was a transfer by gift within the meaning of the statute, it is the substance of the transaction which controls.
After carefully considering the record, we think that the notes executed by the daughters were not intended to be enforced and were not intended as consideration for the transfer by the petitioner, and that, in substance, the transfer of the property was by gift. There is no evidence that petitioner intended to sell the property to her daughters. On the contrary, a donative intent is evidenced. The petitioner testified that the notes were intended to be in the nature of security in the event the bank called the demand note which she had made. However, the events immediately*284 following belie this intention. Petitioner canceled, without consideration, $ 12,000 of her daughters' notes on the day following their execution and canceled an additional $ 12,000 within that week. This was in excess of one-half of the $ 41,000 face value of the notes. The remaining $ 17,000 was canceled by January 5, 1955. At the time of the hearing in this cause the petitioner's note to the bank was still not fully paid. The bank never required security and petitioner owned considerable other property. The argument that petitioner feared the bank would demand payment and that that was the reason she had her daughters execute the notes does not seem very persuasive under these circumstances.
Conversely, these facts lend considerable substance to respondent's argument that the making and canceling of the notes were a mere device to enable the petitioner to avoid the gift tax and to claim exclusions of $ 3,000 each upon cancellation of the notes. We think the record compels a finding that the transfer in question was by gift to the full extent of the value of the remainder interest to the four daughters and that no part was purchased by the daughters. Since the gifts to the*285 daughters were of future interests, no exclusions are allowable under section 1003 (b) (3). United States v. Pelzer, 312 U.S. 399">312 U.S. 399.
As we have already stated, we do not regard the notes which petitioner's four daughters executed to her at the time of the gift as having any effect to reduce the amount of the gift. We have found, and *737 held, that these notes were not given as a part of the purchase price of the property which petitioner conveyed to the trust and did not serve to reduce the amount of the gift. Therefore, even if we assume, as petitioner argues, that the daughters were legally liable on the notes to petitioner, that fact has no effect on the question we have here to decide. The Commissioner has not included as part of the gifts made by petitioner in 1952 the cancellation of the 4 notes for $ 3,000 each which had been executed by the daughters to petitioner. Since no such gifts were included by respondent in his determination of the deficiency, the cancellation cannot be made the basis for the exclusions in the amount of $ 12,000 which petitioner claimed on her return and which she still contends should be granted.
Decision*286 will be entered for the respondent.
Footnotes
1. This provision was amended by agreement dated August 27, 1954, between the settlor and trustees so as to provide that the trust should not terminate later than the death of the last surviving beneficiary.↩
2. The amendment of August 27, 1954, see footnote 1, supra↩, provided that Marie Teague's interest was not assignable.
1. The manner in which the 42/71 interest was arrived at or why the interest conveyed was a 42/71 interest is not explained by the record.↩
1. None.↩
3. Also the trust agreement provided that: "Any undistributed portion of the net income which the trustees in their discretion do not consider necessary to the needs, care, comfort, or support of the settlor shall be added to the corpus of the trust estate."↩
4. All section references are to the Internal Revenue Code of 1939, as amended.↩