Continental Illinois Bank & Trust Co. v. Commissioner

CONTINENTAL ILLINOIS BANK & TRUST COMPANY, EXECUTOR UNDER THE LAST WILL AND TESTAMENT AND CODICILS THERETO OF EDWARD E. AYER, DECEASED, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. Continental Illinois Bank & Trust Co. v. Commissioner Docket No. 52617. United States Board of Tax Appeals 29 B.T.A. 945; 1934 BTA LEXIS 1454; January 30, 1934, Promulgated *1454 In 1925 Edward E. Ayer transferred to the University of Chicago and the Newberry Library of Chicago, both educational institutions, cash and property under an agreement that annuities should be paid to him during life and after his deah to his widow and daughter for their lives. No consideration moved from the wife or the daughter for the annuities to be received by them. Held, that the present worth of the annuities to the widow and daughter at the date of the transfers to the educational institutions constituted gifts subject to the gift tax imposed by the Revenue Act of 1924. Hugh W. McCulloch, Esq., for the petitioner. J. R. Johnston, Esq., and Paul C. Croarkin, Esq., for the respondent. SMITH *945 This is a proceeding for the redetermination of a deficiency in gift tax for the calendar year 1925 in the amount of $308.02. *946 FINDINGS OF FACT. The petitioner, as successor by consolidation to the Illinois Merchants Trust Co., is the executor under the last will and testament and codicils thereto of Edward E. Ayer, who died on May 3, 1927, a resident of Cook County, Illinois. On January 29, 1925, Edward E. Ayer*1455 entered into the following contract with the University of Chicago: THIS AGREEMENT, made this 29th day of January, A.D. 1925, between Edward E. Ayer of Chicago, Illinois, hereinafter called the party of the first part, and The University of Chicago, a corporation organized and existing under and by virtue of the laws of the State of Illinois, of Chicago, Illinois, hereinafter called the party of the second part: WITNESSETH: NOW, THEREFORE, in consideration of the payment by the party of the first part to the party of the second part of the sum of One Hundred Thousand Dollars ($100,000), the receipt of which is hereby acknowledged, the party of the second part agrees that it will pay to the party of the first part an annuity of Six Thousand Dollars ($6,000) for and during the natural life of the party of the first part, said payment to be made in semi-annual installments at the rate of Three Thousand Dollars ($3,000) each on the first days of January and July of each year. It is further understood and agreed that from and after the death of the party of the first part, the party of the second part agrees that it will pay to Emma B. Ayer, the wife of the party of the first part*1456 and/or Elizabeth Ayer Johnson, the daughter of the party of the first part, for and during their natural lives thereafter, an annuity or annuities, as the case may be, under the following conditions, to-wit: To the said Emma B. Ayer and to the said Elizabeth Ayer Johnson each an annuity of Three Thousand Dollars ($3,000); provided that the annuity in the case of the said Emma B. Ayer shall be the sum of Six Thousand Dollars ($6,000), if and when she shall be the sole survivor, and provided further that the annuity in the case of the said Elizabeth Ayer Johnson shall be the sum of Five Thousand Dollars ($5,000) if and when she shall be the sole survivor. It is further understood and agreed that the annuities to the said Emma B. Ayer, and/or Elizabeth Ayer Johnson, as the case may be, as hereinabove provided for, are to be paid in semi-annual installments at the rate herein set forth on the first days of January and July of each year. It is further understood and agreed that upon the death of the last survivor of the said Edward E. Ayer, the said Emma B. Ayer and the said Elizabeth Ayer Johnson, all payments by the said party of the second part shall cease. The party of the*1457 first part gives to the party of the second part full and complete discretion with respect to the manner and purposes for which the said fund and any income arising therefrom may be used in connection with the educational work of The University of Chicago. In making the above gift the party of the first part has been prompted both by a desire to co-operate in the furthering of the educational work of The University of Chicago and by a desire to express his regard for his friend, Mr. Martin A. Ryerson. On December 9, 1925, Edward E. Ayer entered into a contract with the Newberry Library whereby Ayer delivered to it United *947 States Fourth Liberty Loan 4 1/4 percent bonds of the par value of $100,000, and the Newberry Library agreed to pay an annuity of $6,000 a year to Edward E. Ayer during his lifetime and further agreed after the death of Edward E. Ayer to pay to his wife and daughter annuities upon the terms stated in the contract. Edward E. Ayer was born on November 16, 1841; Emma B. Ayer, his wife, referred to in the above mentioned contracts, was born on November 25, 1845, and his daughter Elizabeth Ayer Johnson was born on November 28, 1866. Edward E. Ayer*1458 did not acknowledge any gift tax liability for the year 1925. The respondent determined, however, that he transferred by gift in 1925 the total amount of $202,668.75, representing $100,000 cash paid to the University of Chicago and $100,000 par value Fourth Liberty Loan bonds of a then value of $102,668.75. He further determined that the present worth of the gifts to the educational institutions was $75,485.19, that the present worth of an annuity of $6,000 payable to Ayer by each of the educational institutions for the remainder of his life was $46,381.64, that the present worth of the annuities to be paid to the widow and daughter pursuant to the provisions of the contracts was $80,801.92, and that this amount less $50,000 gift tax exemption was $30,801.92, upon which he has determined a gift tax deficiency in the amount of $308.02. OPINION. SMITH: The question presented by this proceeding is whether the gift tax imposed by the Revenue Act of 1924 attaches to the value of annuities payable to others than the purchaser thereof, the annuity contracts being purchased in 1925 and the other annuitants paying no consideration or an inadequate consideration therefor. The provisions*1459 of the Revenue Act of 1924 material to a disposition of the issue are as follows: SEC. 319. For the calendar year 1924 and each calendar year thereafter, a tax equal to the sum of the following is hereby imposed upon the transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly, and upon the transfer by a nonresident by gift during such calendar year of any property situated within the United States, whether made directly or indirectly: 1 per centum of the amount of the taxable gifts not in excess of $50,000; * * * SEC. 320. If the gift is made in property, the fair market value thereof at the date of the gift shall be considered the amount of the gift. Where property is sold or exchanged for less than a fair consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the consideration received shall, for the purpose of the tax imposed by section 319, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year. *948 Article 7 of Regulations 67 (Treasury Decision 3648) sets forth the manner of determining*1460 the value of a gift which takes the form of an annuity. In subdivision (7) it is stated: * * * Where the donor purchases an annuity for the donee payable at the end of annual periods throughout the life of the latter the value thereof, as of the date of the gift, should be determined by Table A, a part of this article. * * * The record in this case does not show that Edward E. Ayer's wife and daughter paid anything for the annuities procured for them by Ayer. The value of the annuities payable to them has been computed by the respondent and the method of computation is not challenged by the petitioner, except that the petitioner raises a question as to the correctness of using a 4 percent table for the determination of the value in view of the fact that the Liberty Loan bonds constituting a gift to the Newberry Library bore 4 1/4 percent. For reasons which will be stated below, we affirm the Commissioner's determination. It will be noted from section 319 of the taxing act above quoted that the gift tax is imposed upon the "transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly." By section 320 it is*1461 provided that if property is sold for less than a fair consideration in money or money's worth, then the amount by which the fair market value of the property exceeded the consideration received shall be taxable as a gift. In Murry Guggenheim,24 B.T.A. 1181, this Board said: * * * We think it must be conceded that the term "gift" as used in the statute merely designates the transfers selected for tax, i.e., only such transfers as are donative in character have been selected. The term designates the character of the transfer rather than the medium used in effecting it. * * * The petitioner contends that a donative intent was lacking upon the part of Ayer in making the transfers to the University of Chicago and to the Newberry Library; that Ayer purchased annuity contracts from these institutions and paid a valuable consideration therefor. We are of the opinion, however, that this is not correct. In the first place, there is no assumption that either of these institutions was in the business of making annuity contracts. The institutions would not have entered into the contracts unless the elements of a gift were present. In the second place, at the time of*1462 the making of the transfer to the University of Chicago Ayer was 84 years old, and his wife and daughter were 80 and 59 years old, respectively. The application of mortality tables to the annuities payable clearly shows a gift to the institutions. In the third place, the contract made with the University of Chicago specifically provides: * * * In making the above gift the party of the first part has been prompted both by a desire to co-operate in the furthering of the educational *949 work of The University of Chicago and by a desire to express his regard for his friend, Mr. Martin A. Ryerson. Clearly, this indicates an intention on the part of Ayer to make a gift of some value to the University of Chicago and the respondent has determined that a gift was made to each of these educational institutions by Ayer, which gift is not subject to tax by virtue of section 321(a)(2) of the Revenue Act of 1924. We also think it clear that there was an expectation on the part of all concerned that annuities would be paid by the educational institutions to Ayer's wife and daughter after Ayer's death; also that a gift may take the form of an annuity to other than the purchaser of*1463 the annuity. The regulations provide for the taxation of a gift taking the form of an annuity. It appears to us to be immaterial whether the annuitant is to receive the annuity from the date the contract is entered into or from a future date. Where one purchases an annuity for another he has at least indirectly made a gift to that other and the gift tax is imposed upon transfers made "directly or indirectly." The petitioner cites article 1 of Regulations 67, to the following effect: * * * A transfer which is neither a sale nor an exchange does not involve a gift if there is a valid, even if not an adequate, consideration for the transfer. We are of the opinion that the sentence of the regulation quoted has no application to the situation presented in this proceeding. Clearly, Ayer intended by his contracts with the educational institutions to provide for his widow and daughter, either or both surviving him. The transfers of the property made by Ayer in 1925 were desired to accomplish this purpose. From the date the contracts were entered into the wife and daughter acquired rights of value - rights to receive annuities after the death of Ayer and for the period of their*1464 lives. The value of their rights was, in our opinion, an appropriate subject for the imposition of the gift tax. Cf. Burnet v. Guggenheim,288 U.S. 280. The petitioner further contends that the respondent was not justified in determining the value of the annuities to Ayer's wife and daughter by the use of mortality tables, and in its brief states: * * * it should be particularly noted that under the provisions of the contract dated December 9, 1925, Mr. Ayer delivered to The Newberry Library, United States Fourth Liberty Loan Bonds, bearing interest at 4 1/4%. The tables used by the Commissioner of Internal Revenue in computing the value of life estates are based upon a return of not more than 4% of interest per annum on the investment. As these Liberty Loan Bonds bore interest during the lifetime of Mr. Ayer at the rate of 4 1/4%, the use of 4% tables gives an improper result, assuming that it is proper to compute this tax with the aid of any mortality tables. *950 It must be manifest that in the valuation of the annuities payable to Ayer's wife and daughter resort must be had to mortality tables. The use of such tables in the valuation of annuities*1465 has often been upheld by the courts. Cf. Ithaca Trust Co. v. United States,279 U.S. 151. The contention of the petitioner that the respondent has erred in using a 4 percent mortality table in connection with the valuation of the annuities payable by the educational institutions is in our opinion without merit. The mere fact that the Liberty bonds turned over to the Newberry Library bore interest at the rate of 4 1/4 percent is immaterial. The Newberry Library was not required to retain those bonds to maturity or for any particular period. The record contains no evidence that the annuities were not properly valued in accordance with the respondent's regulations. The contention of the petitioner upon this point is therefore not sustained. Reviewed by the Board. Judgment will be entered for the respondent.