Opinion · United States Tax Court

Roberts v. Commissioner

2 T.C. 679

Type
Opinion
Court
United States Tax Court
Jurisdiction
Federal
Date
1943-09-14
Topic
estate-planning

OPINION. Black, Judge: In this proceeding there is no issue as to the amounts of the gifts which petitioner made in the taxable years 1939,1940, and 1941. The only issue is as to whether the gifts which petitioner made in the respective taxable years of payments of premiums on certain annuity policies described in our findings of fact were gifts of future interests, as respondent has determined in his deficiency notice, or were gifts of present interests, as the petitioner here contends. This issue also extends to the year 1938, but not because the Commissioner contends for any change in petitioner's gift tax liability as shown by her gift tax return filed for that year. He has determined no deficiency in petitioner’s gift tax for the year 1938, but he has determined deficiencies in petitioner’s gift taxes for the years 1939,1940, and 1941, and in this determination he has held that the gifts of the policies in question and the payment of premiums thereon in 1938 were gifts of future interests in property and that he erred in his allowance to petitioner of the exclusions claimed by her on her gift tax return for that year, and that he should now correct same by the allowance of only the proper exclusions for 1938 based on the direct cash gifts which petitioner made in that year in determining the proper amount of net gifts to be carried forward in determining petitioner’s gift tax liability for the years which we have before us.

Citator

UpLaw has not yet analyzed Roberts v. Commissioner. The absence of a flag is not a finding that it is good law.

Cited by
2 opinions
ROBERTS v. COMMISSIONER OF INTERNAL REVENUE,2 T.C. 679(1943)
DORA ROBERTS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Docket No. 88.
United States Tax Court.
Promulgated September 14, 1943.
Petitioner in 1938 made gifts to her three grandsons of certain guaranteed annuity policies and paid the annual premiums due thereon. In 1939, 1940, and 1941 petitioner paid the premiums on such policies and returned the amounts thereof in her gift tax returns for those years. In her gift tax returns filed for each of the taxable years petitioner treated the gifts of the annuity premiums as gifts of present interests in property and took the full amount of the exclusions provided by section 1003 (b), Internal Revenue Code.Held,that because of certain restrictive provisions in the annuity contracts, the gifts of the contracts were of future interests. Hence the gifts of the annual premiums in the taxable years to keep such contracts in force were also gifts of future interests.Commissionerv.Boeing,123 Fed. 2d 86;Frances P. Bolton,1 T.C. 717, followed.
Harry C. Weeks, Esq.,for the petitioner.Donald P. Moyers, Esq.,for the respondent.
The Commissioner has determined deficiencies in gift taxes against petitioner for the calendar years 1939, 1940, and 1941 of $1,423.34, $2,620.06, and $1,682.30, respectively.Page 680

In determining petitioner's gift tax liability for the year 1938, a year which is not before us in this proceeding except in the manner hereinafter stated, the Commissioner allowed the exclusions claimed by petitioner on the gift tax return which she filed for that year. In his determination of the deficiencies in gift taxes involved in this proceeding for the years 1939, 1940, and 1941 respondent limited the exclusions claimed with respect to Roger Ellwood Canter, Curtis Kendal Canter, and Horace Garrett to amounts of cash given during those years to those donees, and denied the exclusion of the premiums paid by petitioner on certain annuity policies theretofore taken out for the benefit of said donees. On this account, in the year 1939 the respondent reduced the exclusions claimed by petitioner from $17,902.76 to $8,202.76. Likewise, in determining the deficiency for 1939 respondent increased the net gifts for the year 1938 by the sum of $14,800 by limiting the exclusions applicable to Roger Ellwood Canter, Curtis Kendal Canter, and Horace Garrett to $50, $50, and $100, respectively, these being the amounts of direct cash gifts to them in that year.

In determining the deficiency for the year 1940 respondent reduced the exclusions claimed by petitioner from $20,460.72 to $10,160.72 by reason of holding that the payments of premiums made to certain insurance companies were gifts of future interests to which the exclusions provided by statute did not apply, and by giving effect to. said exclusions only to the extent petitioner had made other gifts to said donees.

Likewise, in determining the deficiency for the year 1941 respondent reduced the exclusions claimed by petitioner from $21,219.17 to $9,619.17 by reason of holding that the payments of premiums on certain annuity policies made to said insurance companies were gifts of future interests to which the statutory exclusions did not apply, and by giving effect to said exclusions only to the extent petitioner had made other gifts to said donees.

In determining the aforesaid deficiencies for the years 1940 and 1941 the respondent also increased the net gifts for preceding years as follows: for the year 1940, from $36,188.55 to $60,688.55 and for 1941, from $117,065.76 to $151,865.76. These adjustments were occasioned by the action of the respondent in denying the exclusions heretofore enumerated.

The petitioner by appropriate assignments of error contests the foregoing described adjustments made by the Commissioner and alleges that the gifts of premiums to keep in force certain annuity policies were of present interests in property and not of future interests.Page 681
FINDINGS OF FACT.
Dora Roberts, petitioner herein, is an individual residing at Big Springs, Texas. She filed gift tax returns for the taxable years 1939, 1940, and 1941 with the collector of internal revenue for the second district of Texas at Dallas, Texas.

In the month of December 1938 petitioner made, or caused to be made, applications to Aetna Life Insurance Co. of Hartford, Connecticut, and Connecticut Mutual Life Insurance Co. of Hartford, Connecticut, for the issuance by these two companies of installment annuity contracts in favor of grandchildren of the petitioner as follows:
Aetna Life Insurance Co.
Contract No. AP 7 949 in favor of Roger Ellwood Canter, Annuitant;

Contract No. AP 7 950 in favor of Curtis Kendal Canter, Annuitant; and

Contract No. AP 7 951 in favor of Horace Garrett, Annuitant.
Connecticut Mutual Life Insurance Co.
Contract No. 996,867 in favor of Roger Ellwood Canter, Annuitant;

Contract No. 996,868 in favor of Horace Garrett, Annuitant; and

Contract No. 996,869 in favor of Curtis Kendal Canter, Annuitant.

The proposals for the issuance of the annuity contracts referred to above were accepted by the insurance companies to which addressed, and, upon the payment of the required initial premium, annuity contracts, evidenced by policies bearing the above referred to numbers, were executed by Aetna Life Insurance Co. and Connecticut Mutual Life Insurance Co., respectively.

Typical of the annuity contracts executed by Aetna Life Insurance Co. is that in favor of Roger Ellwood Canter, annuitant, evidenced by policy No. AP 7 949. Under this policy, which was dated December 18, 1938, Aetna Life Insurance Co. agreed to pay to Roger Ellwood Canter (then nine years of age) a life annuity payable monthly to commence upon the anniversary date of the policy nearest to the age of the annuitant elected from a table beginning with age fifty and ending with age sixty. If the annuitant should die before reaching the age of fifty, the beneficiary of the policy should receive "a death benefit equal to the cash surrender value of this policy herein described for the end of the policy year in which death occurs (less any unpaid premiums for the current policy year) or equal to the total premiums paid hereon, whichever amount is greater." The beneficiaries of the death benefits named in the policy were the mother or brother of the annuitant, if they survived him, and if not, then the executors or administrators of the annuitant.Page 682

As to the right to receive cash values and dividends and exercise other privileges under the contract, paragraph 2 at page 3 of the policy reads as follows:

During the lifetime of the annuitant, the right to receive all cash values, dividends and other benefits accruing hereunder, to exercise all options and privileges described herein, and to agree with the Company to any change in, amendment to, or cancellation of this policy shall vest alone in the life owner (hereinafter so called) designated as follows:

Until the death of Eloise Roberts Canter, mother of the annuitant, said mother shall be the life owner, and after the death of said mother the annuitant shall be the life owner, PROVIDED HOWEVER, that neither said life owner shall have the right to surrender the contract for its cash value except on the following terms and conditions, to wit:

At any time before June 1, 1948 the life owner may elect that the cash value of the contract be payable to the annuitant in accordance with Mode 1, interest payable monthly, with the proviso that on June 1, 1948 the cash value shall then be payable to the annuitant in accordance with Mode 4 in monthly installments for a fixed period of Ten (10) years and for as long thereafter as the annuitant shall live.

On or after June 1, 1948 the life owner may elect that the cash value be payable to the annuitant in accordance with Mode 4 in monthly installments for a fixed period of Ten (10) years and for as long thereafter as the annuitant shall live.

All sums payable by the Company under this policy shall be payable at its Home Office. The death benefit will be payable under the terms hereof only upon receipt by the Company of this policy duly released.

Typical of the annuity contracts entered into by Connecticut Mutual Life Insurance Co. is that in favor of Roger E. Canter (the same as Roger Ellwood Canter), evidenced by policy 996,867. Under this policy the Connecticut Mutual agreed to pay an income for life of $1,248.50 per month to Roger E. Canter, beginning the 21st day of December 1984. The beneficiaries named in said policy of the "Death Benefit Before Maturity Date" provided in the policy were the mother, aunt, cousin, and brother of the annuitant, depending on survivorship, with limitations on their method of enjoyment up to and after ten years from date of said policy. With respect to the exercise of privileges under the policy, it is provided:

The right to receive all cash values, loans, dividends and other benefits accruing hereunder, to change the beneficiary, to exercise all privileges and options contained herein, and to agree with the Company to any release, modification or amendment of this contract, shall, unless herein otherwise specifically provided, belong and be available without the consent of any other person, to Eloise R. Canter, if living, during the period prior to December 21, 1948; and subsequent to December12,fn*1948, or if said Eloise R. Canter be deceased, to the Annuitant.

The policy carried the following endorsement:

Anything in the printed provisions of this Contract to the contrary notwithstanding, no person or persons entitled to exercise the privileges of this ContractPage 683shall have the right, power or privilege to change any beneficiary hereunder, withdraw any cash or loan values or dividends prior to December 21, 1948, and after said date only for the purpose of leaving such amounts under Option 2 or Option B or D, under the terms and conditions set forth in such options, for the benefit of the Annuitant.

Option 2 and options B and D were all exercisable by the annuitant at the maturity date of the contract.

The annuity policy herein above described, No. 996867, carried on its reverse side the following provision, viz:

The Annuitant under this Contract is a member of this Company and enjoys thereby the advantages of annual participation in surplus earnings until the maturity date as provided in this contract and the right to vote, in person or by proxy, at all meetings of its members.

The annuity contracts, evidenced by petitioner's Exhibits Nos. 1 to 6, inclusive, each called for the payment of annual premiums for a specified term of years. They were of the type of policy termed a guaranteed endowment annuity. The basic provisions of each policy called for premiums of $2,500 a year for a specified period of years until a named maturity date, and then a payment to the annuitant of a specified sum of money per month for life, beginning with the maturity date of the contract.

The two annuity policies described in the foregoing findings, which the parties agree are typical of all six of the policies, are incorporated herein by reference and made a part hereof.

At the time of the application for all six of the annuity policies petitioner, who was the grandmother of the three proposed annuitants, gave her check, or checks, to the agent for the issuing insurance company for the first annual premium payable with respect to each of the annuity contracts. Petitioner signed most of the applications for said policies, but did not obligate herself in any way for payment of future premiums on the policies. In the taxable years involved in this proceeding petitioner made gifts to her three grandsons by paying on their respective behalves the annual premiums due under the annuity contracts, which payments were as follows:

(a) December 27, 1939, Connecticut Mutual Life Insurance Co., $7,500.

(b) December 29, 1939, Aetna Life Insurance Co., $7,500.

(c) December 16, 1940, Aetna Life Insurance Co., $5,000, being the sum of $2,500 paid with respect to policy No. AP 7 950 (Curtis Canter), and $2,500 paid with respect to policy No. AP 949 (Roger Canter).

(d) December 16, 1940, Connecticut Mutual Life Insurance Co., $5,000, being the sum of $2,500 paid with respect to policy No. 996,869 (Curtis K. Canter), and $2,500 paid with respect to policy No. 996,867 (Roger E. Canter).Page 684

(e) December 31, 1940, Connecticut Mutual Life Insurance Co., $1,250 (part payment of premium in the amount of $2,500 on policy No. 996,868 in favor of Horace Garrett).

(f) December 31, 1940, Aetna Life Insurance Co., $1,250 (one-half of 1940 premium on policy No. AP 7 951 in favor of Horace Garrett).

(g) June 7, 1941, Connecticut Mutual Life Insurance Co., $1,275 paid with respect to policy No. 996,868 (Horace Garrett).

(h) June 7, 1941, Aetna Life Insurance Co., $1,275 paid with respect to policy No. AP 7 951 (Horace Garrett).

(i) December 10, 1941, Connecticut Mutual Life Insurance Co., $5,000, and December 10, 1941, H. G. Harris Co. (agents for Aetna Life Insurance Co.) $5,000, being payments, in each instance, on the two Canter policies, and on December 31, 1941, $2,500 to Aetna Life Insurance Co. and $2,500 to Connecticut Mutual Life Insurance Co., each being payments on the Horace Garrett annuity contracts.

(j) In addition to the foregoing payments, under date of January 22, 1941, a payment of $25 was made to Connecticut Mutual Life Insurance Co. and a payment in like amount to W. G. Harris Co. (agents for the Aetna Life Insurance Co.), which payments were made with respect to the Horace Garrett annuity contracts, the current premiums on which were then in arrears.

In addition to the above payments on annuity contracts, petitioner made direct cash gifts to her three said grandsons in the years and in the amounts that follow:
Year 1939, Roger Canter ......................... $50 Curtis Canter ........................ 50 Horace Garrett ....................... 2,200 Year 1940, Curtis Canter ........................ 50 Roger Canter ......................... 50 Horace Garrett ....................... 1,600 Year 1941, Horace Garrett ....................... 200 Roger Canter ......................... 100 Curtis Canter ........................ 100
In addition to the payment of the first premium on the policies in 1938, the petitioner made cash gifts in that year to her three grandsons in the total amount of $200.

The gifts of the premiums to keep in force the annuity contracts for the years here involved were gifts of future interests and the petitioner is not entitled to any exclusions with respect thereto in the computation of her Federal gift tax lability.
OPINION.
BLACK,Judge:
In this proceeding there is no issue as to the amounts of the gifts which petitioner madePage 685in the taxable years 1939, 1940, and 1941. The only issue is as to whether the gifts which petitioner made in the respective taxable years of payments of premiums on certain annuity policies described in our findings of fact were gifts of future interests, as respondent has determined in his deficiency notice, or were gifts of present interests, as the petitioner here contends. This issue also extends to the year 1938, but not because the Commissioner contends for any change in petitioner's gift tax liability as shown by her gift tax return filed for that year. He has determined no deficiency in petitioner's gift tax for the year 1938, but he has determined deficiencies in petitioner's gift taxes for the years 1939, 1940, and 1941, and in this determination he has held that the gifts of the policies in question and the payment of premiums thereon in 1938 were gifts of future interests in property and that he erred in his allowance to petitioner of the exclusions claimed by her on her gift tax return for that year, and that he should now correct same by the allowance of only the proper exclusions for 1938 based on the direct cash gifts which petitioner made in that year in determining the proper amount of net gifts to be carried forward in determining petitioner's gift tax liability for the years which we have before us. This the Commissioner is permitted to do. Cf.Estate of J. M.Winterbotham,46 B. T. A. 972.

The provision of the statute applicable to the three taxable years involved in this proceeding is section 1003, Internal Revenue Code, printed in the margin.1A similar provision, section 504 (b), Revenue Act of 1932, is applicable in determining the proper exclusions for the taxable year 1938, which is involved in this proceeding to the limited extent which we have already stated.

The applicable Treasury regulations are Regulations 79, article 11, printed in the margin.2

It has been held that where gifts of policies of insurance to a trust for the benefit of named beneficiaries therein were gifts of future interests, then the subsequent gifts by payment of the premiums to keep these policies of insurance in force are also gifts of future interests.Page 686Commissionerv.Boeing,123 F.2d 86;Frances P. Bolton,1 T.C. 717. Petitioner makes the point in her brief that in both of the cases above cited the gifts were indirectly made through a trust, whereas in the instant case the annuity policies were given outright and there was no intervening trust. This difference will be examined presently in determining whether the gifts by petitioner of the annuity policies in 1938 were gifts of future interests. If we determine that such gifts were of future interests, then we think that the principle decided inCommissionerv.Boeing, supra,andFrances P. Bolton, supra,namely, that where the gifts of the policies were of future interests the subsequent gifts of premiums to keep such policies alive and in effect were also of future interests, is controlling. So we come to the important inquiry: Were the gifts in 1938 by petitioner to her three grandsons of six annuity policies gifts of future interests? Paul, in his work on Federal Estate and Gift Taxation, sec. 15.11, vol. 2, discusses "Future Interests in Property" and, among other things, says:

The Sixth Circuit has held that beneficiaries of insurance policies transferred in trust are the donees of future interests where their enjoyment of the insurance is dependent upon their survivorship of the grantor. This conclusion is in line with the decision in theRyersoncase. Similarly, if insurance is transferred in trust, and the trustee may, in his discretion, surrender the policy for the benefit of the beneficiary, it seems that the beneficiary's interest is "future" rather than "present" because of the contingent character of the beneficiary's right to immediate enjoyment of the surrender value of the insurance.On the other hand, the courts would probably hold that adirect beneficiary or assignee of a life insurance policy whomay obtain its cash surrender value and exercise the otherincidents of ownership has received a present interest. * * * [Italics supplied.]

Could the beneficiaries of the annuity policies involved in the instant case surrender them and obtain their cash surrender values and exercise the other incidents of ownership? In all three of the annuity policies issued by the Connecticut Mutual Life Insurance Co. there is contained the following restrictive provision:

Anything in the printed provisions of this Contract to the contrary notwithstanding, no person or persons entitled to exercise the privileges of this Contract shall have the right, power or privilege to change any beneficiary hereunder, withdraw any cash or loan values or dividends prior to December 21, 1948, and after said date only for the purpose of leaving such amounts under Option 2 or Option B or D, under the terms and conditions set forth in such options for the benefit of the Annuitant.

It seems to us that, while possession of the three annuity policies in the Connecticut Mutual Life Insurance Co. doubtless passed immediately to the donees when the gifts of them were made, nevertheless, under the restrictive provisions quoted above, contained in each ofPage 687these three policies, their use and enjoyment within the meaning of article 11 of Regulations 79, quotedsupra,was postponed to a future date, to wit, at least until December 21, 1948.

The three annuity policies in the Aetna Life Insurance Co. contained the following restrictive provisions:

During the lifetime of the annuitant, the right to receive all cash values, dividends and other benefits accruing hereunder, to exercise all options and privileges described herein, and to agree with the Company to any change in, amendment to, or cancellation of this policy shall vest alone in the life owner (hereinafter so called) designated as follows:

Until the death of Eloise Roberts Canter, mother of the annuitant, said mother shall be the life owner, and after the death of said mother the annuitant shall be the life owner, PROVIDED HOWEVER, that neither said life owner shall have the right to surrender the contract for its cash value except on the following terms and conditions, to wit:

At any time before June 1, 1948 the life owner may elect that the cash value of the contract be payable to the annuitant in accordance with Mode 1, * * *

As we understand the foregoing provision, the three annuitants designated in the three respective policies could not receive the cash surrender values of the policies prior to June 1, 1948, except at the election of the person who had been designated as the life owner of the policy, which in each case was the mother of the annuitant, who was still living during the taxable years. In other words, prior to June 1, 1948, the sole discretion was vested in the mothers of the annuitants to determine whether the annuitants named in the policies should receive the cash surrender value of the policies payable according to mode 1 in the policies. It seems to us that this provision makes the gifts of the policies in 1938 gifts of future interests. Cf.Helveringv.Blair,121 F.2d 945;Fisherv.Commissioner,132 F.2d 383;Joe J. Perkins,1 T.C. 982.

Petitioner, in support of her contention that the gifts of the annuity policy premiums were gifts of present interests and not of future interests, strongly urges the case ofCommissionerv.Kempner,126 F.2d 853. We have carefully considered that case, but think that it is distinguishable on its facts. In that case the beneficiaries of the trust had present rights to any and all proceeds of the notes which were later to be collected by the trustees. This fact the court emphasized in its opinion. No such present rights existed in the donees of the annuity policies in the instant case, as we have already endeavored to point out.

We having held above that the gifts of the policies by petitioner to her three grandsons in 1938 were gifts of future interests, it follows underCommissionerv.Boeing, supra,andFrances P. Bolton, supra,that the gifts of the premiums in the taxable years to keep the policies in force and effect were gifts of future interests. Petitioner is notPage 688entitled to any exclusions by reason of the gifts of these premiums in 1939, 1940, and 1941, nor is she entitled, to any such exclusions in 1938 in determining the amount of net gifts to be brought forward from that year to other years. The Commissioner is sustained.Decision will be entered for respondent.
  1. [evidently a transposition of figures — December 21 is undoubtedly the date meant.] ↩
  2. SEC. 1003. NET GIFTS.

    (a) GENERAL DEFINITION. — The term "net gifts" means the total amount of gifts made during the calendar year, less the deductions provided in section 1004.

    (b) EXCLUSIONS FROM GIFTS.

    * * * * * * *

    (2) GIFTS AFTER 1938. — In the case of gifts (other than gifts in trust or of future interests in property) made to any person by the donor during the calendar year 1939 and subsequent calendar years, the first $4,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year. ↩
  3. ART. 11.Future interests in property. — No part of the value of a gift of a future interest may be excluded in determining the total amount of gifts made during the calendar year. "Future interests" is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. The term has no reference to such contractual rights as exist in a bond, note (though bearing no interest until maturity), or in a policy of life insurance, the obligations of which are to be discharged by payment In the future. But a future interest or interests in such contractual obligations may be created by the limitations contained in a trust or other instrument of transfer employed in effecting a gift. * * * ↩