*255 Decision will be entered under Rule 50.
1. Held, neither the oral trust nor the written trust here involved was "expressly made irrevocable by the instrument creating the trust * * *" as provided in section 2280, Civil Code of California.
2. Held, transfer of trust assets on May 2, 1946, to guardianship estate of minor beneficiary constituted a taxable gift. Harris v. Commissioner, 340 U.S. 106">340 U.S. 106, distinguished.
3. The value of the gift consummated May 2, 1946, held, not to include a certain item in the amount of $ 64,035.05, the existence of which is the subject matter of a separate income tax proceeding by the same taxpayer in another docketed case currently pending hearing before this Court.
*708 This proceeding involves a deficiency in gift tax of petitioner for the year 1946 in the amount of $ 71,195.99.
The issues presented are: (1) Whether the transfer by petitioner in 1943 of certain property in trust constituted a completed gift in that year or whether, as determined by respondent, the completed gift occurred in 1946 upon termination of the trust and distribution of the corpus to the guardian for the beneficiary; and (2) whether such gift, if effected in 1946, included an item described in respondent's notice of deficiency as "Overpayment of Income Tax and Accrued Interest for the Years 1943-1945" at a value of *257 $ 64,035.05.
One other issue raised by the pleadings herein has been settled by stipulation of the parties and will be reflected in a Rule 50 computation.
*709 FINDINGS OF FACT.
So much of the facts as were stipulated are made a part hereof by this reference.
The petitioner is an individual residing in Sherman Oaks, California. The gift tax return for the calendar year 1946, here involved, was filed on or about June 23, 1947, with the collector of internal revenue for the first district of California, at San Francisco.
Petitioner was divorced from Aaron Senderman in 1940. Thereafter she was unmarried and her name at all times material hereto prior to December 1944, was Lois J. Senderman. In December 1944, petitioner married Louis Newman, and her name from that time to the present has been Lois J. Newman. Petitioner has had only one child, a daughter, named Lois E. Senderman, who was born on May 14, 1935.
For a number of years prior to January 1, 1943, petitioner owned as her separate property 2,396 7/8 shares of stock of Aztec Brewing Company (hereinafter called Aztec), a California corporation operating a brewery in San Diego, California. These shares represented approximately*258 one-fourth of the issued and outstanding stock of such corporation, and had been inherited by petitioner from her parents in 1935.
On or about January 1, 1943, Richard S. Goldman, who was petitioner's attorney from 1935 until his death in 1946, received from petitioner 800 shares of stock in Azetc, to be held in trust by him for petitioner's daughter, Lois E. Senderman. At the time of the receipt, Goldman orally declared himself to be trustee of such trust, effective immediately. Some 6 or 7 months thereafter, Goldman, as trustee, executed a written declaration of trust under which he declared himself trustee of 800 shares of Aztec stock for the benefit of Lois E. Senderman. This declaration of trust was predated to January 1, 1943. Such declaration of trust was not "expressly made irrevocable."
Petitioner filed Federal and State of California gift tax returns for the calendar year 1943 in which she reported a gift to her daughter of 800 shares of Aztec stock by reason of the creation of the foregoing trust. The value of such gift was reported in the Federal return as $ 30,000 with no gift tax payable thereon.
On or about February 24, 1944, Aztec Brewing Company, a limited partnership, *259 was formed. On or about March 31, 1944, Aztec Brewing Company, a corporation, was dissolved. The assets and liabilities of the corporation were transferred to the partnership. The stockholders in the corporation became partners in the new partnership with partnership interests proportionate to their respective stockholdings in the corporation. The trust for Lois E. Senderman became a limited partner with an 8 per cent partnership interest. The fair *710 market value of an 8 per cent interest as a limited partner of Aztec, a limited partnership, on May 2, 1946, and throughout the calendar year 1946, was $ 151,051.09.
On March 1, 1946, Richard S. Goldman died. On March 26, 1946, Richard N. Goldman, his son, was appointed the executor of his estate and on that day qualified as such. On April 5, 1946, Clarissa Shortall, as attorney for Richard N. Goldman, filed a petition for appointment of successor trustee or trustees in place of the deceased trustee, and was appointed on that day successor trustee to Richard S. Goldman by order of the Superior Court in and for the city and county of San Francisco, California.
On May 2, 1946, upon petition of the substitute trustee so appointed, *260 the Superior Court in and for the city and county of San Francisco, California, appointed Clarissa Shortall as guardian of the estate of Lois E. Senderman. On that date the assets of the trust for the minor, Lois E. Senderman, were transferred to Clarissa Shortall pursuant to the court order appointing her as guardian. Clarissa Shortall had been associated with the elder Goldman and had participated with him in the handling of the trust matters. The appointment of a guardian and creation of the guardianship estate was provided for in the original trust indenture executed as of January 1, 1943, upon resignation or death of the original trustee.
After the revenue agent, who examined the tax returns of petitioner and her daughter, raised a question as to the revocability of the daughter's trust, Clarissa Shortall, on or about April 22, 1947, as guardian for such minor, filed a petition with the Superior Court in and for the city and county of San Francisco, California, for instructions. Paragraph 6 thereof reads, in part, as follows:
6. That it was the intention of said Lois J. Newman, said trustor and donor, and of Richard S. Goldman, said Trustee, that said trust, * * * be irrevocable*261 and that the gift made thereby be irrevocable; and that the failure so to state specifically in said Declaration of Trust occurred through inadvertence and error and contrary to the express instructions of said Lois J. Newman.
On or about June 23, 1947, Clarissa Shortall further filed with such court an amended petition for instructions in which, for the first time, reference was made to the existence of an oral trust. In addition, it is stated therein that through inadvertence and error the written trust failed to contain an express provision as to its irrevocability.
On June 24, 1947, petitioner filed, as a protective measure, a gift tax return relating the history of the trust and claiming no gift tax then due for the year 1946, such return showing no tax due.
On July 10, 1947, a court hearing was held on the amended petition and evidence, both oral and documentary, was offered. Clarissa Shortall, as guardian, appeared in person and by her attorney. Petitioner also appeared in person and by her attorney. After the case was *711 heard and argued the court entered an order wherein it adjudged and decreed that:
1. On or within a few days after January 1, 1943, said Lois J. *262 Senderman (now Lois J. Newman) orally created an irrevocable trust by instructing Richard S. Goldman to act as trustee of 800 shares of stock of Aztec Brewing Company, the certificates of which he held in his possession and by said Richard S. Goldman orally agreeing to do so. Said oral trust became effective immediately upon its creation and continued in effect until terminated by the appointment of Clarissa Shortall as guardian of the estate of said minor on May 2, 1946, and the transfer on or about said date of said trust property to said guardian.
2. Some six or seven months after the creation of said oral trust said Richard S. Goldman executed a written trust. * * * Said written trust was intended to embody the terms of said oral trust.
3. Said written trust did not terminate or modify said oral trust theretofore created but said oral trust continued in effect until terminated on May 2, 1946, by the appointment of Clarissa Shortall as guardian of the estate of said Lois E. Senderman and the transfer of the trust property to her as said guardian.
4. Said Clarissa Shortall as such guardian has held and now holds said property irrevocably for the use and benefit of said minor.
*263 The petitioner and her minor daughter, during the calendar year 1943, and during all subsequent years, were on a calendar year cash basis for Federal and State of California income tax purposes. The trust for the minor during the calendar year 1943 and during all subsequent years until its termination in 1946, was on a calendar year cash basis for Federal and State of California income tax purposes. For the calendar year 1943 and for all subsequent years, the trust for Lois E. Senderman (up to the time of its termination) and/or that for the minor reported in their respective Federal and State of California income tax returns the entire income from 800 shares of Aztec stock and from the partnership which replaced that corporation and from the other investments which were purchased with the income from the 800 shares and the distributions from the partnership.
By means of letters of the type commonly known in Federal tax circles as 30-day letters, addressed to the trust and to the minor, both of which letters being dated August 25, 1949, the internal revenue agent in charge, San Francisco division, proposed overassessments in income tax in favor of the trust and of the minor for *264 the calendar years 1943 through 1945 in the aggregate amount of $ 62,763.47, as follows:
| Amount of | ||
| Calendar year | Taxpayer | proposed |
| overassessment | ||
| 1943 | Lois E. Senderman, a minor | $ 3,285.48 |
| 1944 | Lois E. Senderman, a minor | 6,776.42 |
| 1945 | Lois E. Senderman Trust | 52,701.57 |
On March 3, 1950, the trust and the minor filed protests with the Bureau of Internal Revenue against such overassessments. No part *712 of any of the proposed overassessments nor any interest thereon has been received by the trust or by the minor nor has any part thereof been scheduled for refund to the trust or the minor.
The Commissioner, in a notice of deficiency dated January 23, 1951, determined deficiencies in income tax against the petitioner for the calendar years 1943 to 1947, inclusive, as follows:
| Year | Deficiency |
| 1943 | $ 7,575.67 |
| 1944 | 43,486.63 |
| 1945 | 63,164.93 |
| 1946 | 102,072.23 |
| 1947 | 28,084.93 |
These deficiencies are based mainly, and the overassessments, referred to above, are based wholly, upon the inclusion in petitioner's income of all of the income reported by the trust and by the minor during the calendar years 1943 to 1947, inclusive (except that the deficiency*265 for 1944 is based upon an addition to petitioner's income of approximately $ 78,000, of which approximately $ 20,000 represents income reported by the minor). The amount of the deficiency determined against petitioner for each of the years involved, which is attributable to inclusion in petitioner's income of all of the income reported by the trust and by the minor is in excess of the amount of the overassessment proposed in favor of the trust or the minor for the same calendar year. The petitioner, on April 9, 1951, filed a petition with this Court, which petition was docketed as No. 33431, in which it was alleged that the deficiencies were erroneously asserted and that the inclusion of the income of the trust and the minor in petitioner's income for each of the calendar years is erroneous. That proceeding is now pending before this Court.
OPINION.
The parties to this proceeding involving gift taxes for 1946 agree that the transfer by petitioner of the property in controversy for the benefit of her minor daughter constituted a taxable gift within the purview of sections 1000 (a) and 1002 of the Internal Revenue Code. 1 They disagree as to the year, 1943 or 1946, in which the*266 gift was completed. Respondent has determined that the taxable transfer took place in 1946. The pertinent facts are set forth above.
*713 It is respondent's contention that the 1943 trust is not expressly made irrevocable by the declaration of trust instrument creating it, and that, having been so created subsequent to*267 1931, the trust was revocable under section 2280 of the Civil Code of California, as amended in 1931. 2 He argues, therefore, that the transfer of the trust corpus to the guardian of the estate of petitioner's minor daughter on May 2, 1946, constituted a completed gift by the petitioner-donor at that time. Respondent makes no claim in the instant litigation that the income of the trust from its creation in 1943 until its termination in 1946 was taxable to petitioner under either section 22 (a) or 166 of the Code. Citing and relying upon our opinion in Erik Krag, 8 T. C. 1091, as controlling, respondent argues on brief that the decree of the local court amounted only to a consent decree; that, moreover, being made after the trust terminated, it was a moot decree; and that, therefore, we are not bound to give any effect to it whatsoever.
*268 Petitioner, on the other hand, maintains that not only does the trust instrument in controversy meet the requirements of section 2280, supra, as respects its irrevocability but also that the oral trust earlier created was intended to be, and was, irrevocable, and that both trusts remained in existence from the time they were created until they were both terminated in 1946. To support this position, petitioner points to the July 10, 1947, decree of the Superior Court in and for the city and county of San Francisco so construing the trusts. Petitioner cites such cases as Susan B. Armstrong, 38 B. T. A. 658; Estate of Cyrus M. Beachy, 15 T.C. 136">15 T. C. 136; Blair v. Commissioner, 300 U.S. 5">300 U.S. 5, and others of similar import for the proposition that the State court's decree is dispositive of the issue before us and that we are bound to give effect thereto.
The question here in issue turns upon a proper construction of the trusts created by petitioner in 1943. Whether either or both trusts were revocable or "expressly made irrevocable" involves an interpretation of the law of California in which *269 state such trusts were created and administered. The decree of the state court, relied upon by petitioner, involving, as it does, the same subject matter and purporting to construe the property laws of California with regard thereto, is conclusive of the issue here presented if the court decree represented an independent judgment in a real controversy between the parties and was not merely a consent decree entered pro forma in a friendly suit. On the facts here present we cannot catalogue the instant proceeding for instruction as a real and bona fide controversy. *714 There was no controversy between the parties and no independent judgment was rendered. Estate of Ralph Rainger, 12 T. C. 483, affd. (C. A. 9), 183 F. 2d 587; certiorari denied 341 U.S. 904">341 U.S. 904; Saulsbury v. United States (C. A. 5), 199 F.2d 578">199 F. 2d 578.
The facts in this case are so strikingly parallel to those in Erik Krag, supra, and Gaylord v. Commissioner (C. A. 9), 153 F. 2d 408, affirming 3 T. C. 281,*270 and the holding of those cases is so clearly applicable that we need go little further than to cite these controlling authorities. Every question that could be raised, and every contention that is here advanced, is answered therein. Any distinction between those cases and that here before us is in form and not in substance.
There can be no question that the written agreement, as drafted and as in effect in the years 1943 through 1946, was not "expressly made irrevocable by the instrument creating the trust" [emphasis supplied], and under the cases cited must be deemed revocable by the donor under the statute. Nor was the attempt to have the trust construed as irrevocable, as appears in the order of the court of July 24, 1947, effective for tax purposes. Gaylord v. Commissioner, supra.It could not, by a process of retroactivity, defeat the incidence of the Federal tax laws. Here, as in the Gaylord case, it cannot be said that "the gift tax returns with their references to irrevocability had the effect of amending the trust declaration."
Whatever the parties may have had in mind, we are more impressed by what they did in furtherance of*271 their intention, or, more accurately, what they did not do.
The existence of the oral trust was not mentioned in the written instrument, albeit petitioner now contends it was in full force and effect for 6 or 7 months. When the written trust was being prepared, two lawyers, one of them the trustee under the trust, the other his associate and successor as advisor to the trust, both experienced and fully cognizant of the desires of the donor, participated in the drafting of the instrument. Despite the fact, if it be a fact, that both lawyers understood that petitioner wished an irrevocable trust, no reference was made to an existing irrevocable oral trust nor was the word "irrevocable", or any word to the same effect, used or incorporated specifically, or by interpretation or by proper inference, in the writing. Again, difficult to comprehend, is the fact that the oral trust on which petitioner now so heavily leans was not mentioned in the petition filed in April 1946 for appointment of a successor trustee, nor in the petition for appointment of a guardian, nor in the order appointing the guardian, nor yet again, in the original petition by guardian for instructions. All of these*272 documents refer to a written trust and in one of them the statement is made that through error and inadvertence *715 the express mention of irrevocability was omitted from the written declaration of trust.
It was not until June 23, 1947, and after the revenue agent had questioned the character of the trust, that we find mention of the oral trust.
Confronted with these facts, petitioner falls back on the oral trust, contending that at the time it was declared it was expressly made irrevocable and that it remained in existence even after the execution of the written trust. Petitioner points to testimony of petitioner and her lawyer attesting to such fact. Here we would simply quote the old saying, "Actions speak louder than words." The inconsistencies in the evidence, the presence of contradicting documents, and the inferences to be drawn from the whole record lead us reluctantly to the conclusion that the spoken word must yield to the documented conclusion that no irrevocable oral or written trust existed. Moreover, if anything additional need be called to attention to fortify the conclusion as to the oral trust, such trust was rendered wholly void and was effectively wiped*273 out by the back dating of the written trust to January 1, 1943. Certainly, there cannot coexist two such trusts employing the same corpus.
Where, as here, the issue presented on the evidence raises a question of credibility of testimony, the Court is obliged to weigh the evidence carefully, determine the probabilities of accuracy, and accept or discount the evidence by consideration of the interests of the parties, and thus, from the whole record, determine where lies the truth.
If the oral trust was intended to be irrevocable, why, when it was transmuted into the written trust, did the written trust fail to mention either the oral trust or the word "irrevocable"? We find it impossible to believe that Goldman, an experienced lawyer, presumptively familiar with the provisions of section 2280 of the California Code and cognizant of all the facts, would inadvertently omit from the declaration of trust the express provision called for by the statute. One sentence of five words would have sufficed to have removed all question as to the revocability of the trust. Nor can we blink the fact that the petition for instructions was not filed in the California Superior Court until 1947 when*274 the revenue agent raised the question of revocability of the trust, with possible Federal tax consequences.
By changing the names of the parties and a few dates, the pattern in the instant case fits almost precisely into the situation existing in the Krag and Gaylord cases. On the authority of the Krag and Gaylord cases cited above, we sustain respondent's holding that the 1943 written trust, here under study, was a revocable trust; that whatever its form, the oral trust was superseded by the written trust; that the transfer of title occurred in 1946 when the written trust was terminated *716 and the trust property transferred to the guardian for the minor, and that petitioner should be taxed accordingly.
Having found that neither of the trusts created in 1943 was, under California law, irrevocable, and that accordingly no completed gift was consummated in that year, we turn now to consider the facts tax-wise of the May 2, 1946, transfer of trust assets to the guardianship estate of petitioner's minor daughter. Citing Harris v. Commissioner, 340 U.S. 106">340 U.S. 106, petitioner argues that, since the transfer was pursuant to a court order, *275 it does not represent a taxable gift.
The factual situation present in the Harris case is clearly distinguishable at critical and important points, and would appear to have no application here. That case involved a divorce proceeding and a property settlement agreement incident thereto. The settlement in question was clearly an arm's length transaction. The element of donative intent was absent. Nor was a promise or an agreement an operative factor. The transfer was made dependent upon and pursuant to a decree of a court charged under state law with decreeing a just and equitable disposition of the community and separate property of the parties before it. Nevada Compiled Laws, section 9463.
Although she failed legally to effectuate a valid gift for tax purposes, since, as we have seen, it was done by a trust revocable under California law, she, nevertheless, harbored the same donative intent at all times here material. Moreover, the role of the state court here was not that of arbiter between two contesting parties. The terms of the trust instrument itself provided for the termination of the trust and the transfer of the corpus thereof to a guardian. As is customary in*276 the cases involving property rights of a minor, application was made to a court of competent jurisdiction for authorization so to transfer the trust assets and for appointment of a guardian to receive and hold the same. The court's function was merely to see that the transfer was in accord with the trust instrument and to appoint a fit guardian. It exercised discretion only with respect to the latter.
But, contends petitioner, the doctrine of the Harris case is not to be limited and must apply whenever a transfer of property is made pursuant to a court decree. With this contention, we must disagree. Such broad application would have the effect of repealing by judicial process the gift tax statute and would make possible avoidance of a gift tax by the simple expedient of making any gift contingent upon a consent decree of a local court. We cannot believe that the Supreme Court intended or contemplated any such result. Rather, we feel that the drastic consequences "* * * of such a broad application of the Harris case * * * require the strictest limitation of that case *717 to its actual facts." See Taylor and Schwartz, "Tax Aspects of Marital Property Agreements," *277 7 Tax Law Review 9, 49 (November 1951) and the rationale contained therein.
The final issue is whether the gift which we have held was effected on May 2, 1946, included the item described in respondent's notice of deficiency "Overpayment of income tax and accrued interest for the years 1943-1945" in the amount of $ 64,035.05.
Respondent contends that since no valid gift was consummated in 1943, the corpus and the earnings thereon from 1943 to May 2, 1946, constituted the property of petitioner; that it was a mistake and error for the beneficiary to pay income tax on such earnings for 1943 and 1944 and for the trust so to do for 1945; that having mistakenly and erroneously paid such tax, the trust and/or the beneficiary were entitled, as of May 2, 1946, to a return or refund of the taxes so paid, together with interest; that such right amounted, in effect, to a claim for refund, an account receivable, or a chose in action; that this claim for refund, account receivable, or chose in action constituted a valuable property right, which, until May 2, 1946, remained the property of the trustor just as the amount of income taxes and interest would have remained*278 the property of the trustor had no payment been made to the Commissioner and had they remained at all times a part of the trust corpus; and finally, that upon termination of the trust and transfer of the corpus to the guardian for the beneficiary, the property right, as part of the trust corpus, passed to the guardian beyond the control of the trustor and was part of the gift consummated at that time.
While respondent's argument might conceivably be of some weight if the income tax liability were here involved, we feel it to be misplaced and beside the point in the present posture of the parties and the issue involved. The very existence of the valuable property right which respondent says was transferred from petitioner to the guardianship estate has at all times material been in dispute and is presently being contested in another action pending before this Court. Therefore, such contingent property right cannot be said to be in esse prior to the time it is so held to be in that proceeding. Nor can it provide a basis for a determinative conclusion herein. Since the income tax liability is not at issue here, we have no alternative to holding as error, the inclusion of the *279 controverted and contingent amount within the gift consummated May 2, 1946.
Decision will be entered under Rule 50.
Footnotes
1. SEC. 1000. IMPOSITION OF TAX.
(a) For the calendar year 1940 and each calendar year thereafter a tax, computed as provided in section 1001, shall be imposed upon the transfer during such calendar year by any individual, resident or nonresident, of property by gift. * * *
SEC. 1002. TRANSFER FOR LESS THAN ADEQUATE AND FULL CONSIDERATION.
Where property is transferred for less than an adequate and full consideration in money or money's worth, then the amount by which the value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift and shall be included in computing the amount of gifts made during the calendar year.↩
2. SEC. 2280↩. [Revocation of trusts.] Unless expressly made irrevocable by the instrument creating the trust, every voluntary trust shall be revocable by the trustor by writing filed with the trustee. When a voluntary trust is revoked by the trustor, the trustee shall transfer to the trustor its full title to the trust estate. * * *