Appeal from a judgment of the Tax Court, Jules G. Korner III, Judge, holding that certain instruments did not create a completed gift or trust by the decedent so as to make future payments in accordance with their terms excludible from the decedent's gross estate.
Lumbard, Oakes, and Kearse, Circuit Judges.
This is an appeal from a judgment of the Tax Court, Jules G. Korner III, Judge, finding a deficiency as the result of the taxpayer's improper exclusion from the decedent's gross estate of the full fair market value of future payments due to a third party under certain instruments purporting to establish an indebtedness in the form of a gift or a trust. Estate of Grossinger v. Commissioner, T.C. Memo 1982-393 (July 14, 1982).
The facts were stipulated. The decedent, Selig A. Grossinger ("Sandy" hereafter) died in 1972. His grandfather, Selig Grossinger, originally owned fifty percent of the stock in two corporations which respectively operated the well-known resort hotel bearing his name in Sullivan County, New York, and owned the real property on which the hotel is located (the hotel and realty corporations). He died in 1931, leaving this stock in trust, with the income to go to his widow during her life. Upon her death, Selig's will provided that twenty-five percent of the stock would go outright to his daughter, Lottie Grau, and the remaining seventy-five percent would be held in trust, with the income from it to go to his son, Harry, Jr., during his life. The trust was to terminate at Harry, Jr.'s death, and the principal distributed in equal shares to the then living issue of Harry, Jr. Harry, Jr. was married to Freda, and they had two children after the death of grandfather Selig, including Sandy, the decedent here, and Mary Ann Klein. On the death of Selig's widow in 1952, twenty-five percent of the trust corpus, consisting of shares in the hotel and realty corporations, was distributed outright to Lottie Grau; the remaining shares were held in trust for the benefit of Harry, Jr., as income beneficiary, until his death in 1965.
Before Lottie Grau died in 1962, she had brought a derivative suit as a shareholder in the hotel and realty corporations against the holders of the other fifty percent of the stock. The trustee under Selig Grossinger's will joined in the action as a shareholder plaintiff. The case was settled. Under the agreement, the shareholder plaintiffs' stock was purchased for about $2,000,000. The trustee under Selig Grossinger's will received part of the cash payment of $200,000 and a mortgage note in the sum of $1,345,000 payable with interest over a period of twenty years. Concomitant to and contemporaneous with the settlement and stock sale in 1963, Harry, Jr. and his two children, Sandy Grossinger and Mary Ann Klein, executed an agreement, whereby all three consented to the sale of stock by the trustee under Selig Grossinger's will. The parties also stipulated that Sandy and Mary Ann would provide $25,000 a year from the proceeds of their inheritance under the will of Selig Grossinger to their mother, Freda, for the rest of her life. The specific language of this agreement of August 27, 1963, is set out in the margin.*fn1 It was stipulated below that neither Sandy nor any other person at his request received any money or money's worth in goods for entering into this agreement.*fn2
Harry, Jr. died on April 9, 1965. On the day before Harry's death, in anticipation thereof, Sandy entered into a trust agreement whereby he transferred to three trustees the sum of $1,000, together with all of his interest and rights to all property to which he might be entitled as remainderman under the will of his grandfather. The pertinent language of this April 8, 1965, trust agreement is set out in the margin.*fn3
On November 3, 1965, Sandy executed an assignment authorizing his trustees under the trust of April 8, 1965, to receive all the property to which he was entitled as remainderman under his grandfather's will.*fn4 On November 10, 1965, the trustee of the terminated trust under Selig Grossinger's will executed an assignment of the interests in the mortgage note payable by the hotel and realty corporations to Mary Ann Klein and to the trustees of the trust created by Sandy on April 8, 1965. Pursuant to an authorization in December, 1965, executed by Mary Ann Klein individually and by Sandy Grossinger as settlor of the April 8, 1965, trust, as well as by the trustees thereof, payments on the mortgage were made thereafter to a law firm which paid Freda Grossinger $6,250 per quarter or $25,000 a year. The remainder of the payments were divided equally between Mary Ann Klein and the trustees under Sandy's trust agreement of April 8, 1965.
After the death of Sandy Grossinger on September 30, 1972, the amounts payable to the trustees were made payable to Sandy's executors. The pertinent portions of his will are set forth in the margin.*fn5 The parties have stipulated the fair market value of the notes due from the hotel and realty corporations as of the date of Sandy Grossinger's death in 1972, as well as the fair market value of an annuity payable to Freda Grossinger of $12,500 per year as of August 27, 1963, November 3, 1965, and September 30, 1972.
On audit of the estate's tax liability, the Commissioner determined that the full value of the mortgage note receivable from the hotel and realty corporations was includable in Sandy Grossinger's gross estate, without deduction for any amounts payable to Freda. The estate sought redetermination of the assessed deficiency. It argued that the agreement of August 27, 1963, effected a completed gift of an annuity interest in the decedent's share of the proceeds of the testamentary trust established by Selig's will to Freda for her lifetime, and that, therefore, the value of the mortgage note should be reduced by the actuarial value of the asserted annuity. Alternatively, the estate contended that a completed gift was made to Freda by the April 8, 1965, trust agreement.
The Tax Court concluded that under New York law the 1963 agreement did not result in a completed transfer to Freda of a beneficial interest in the subject property, but simply represented a promise to make a gift in the future. It then held that while the April 8, 1965, trust constituted a completed gift of such an annuity interest, the annuity interest was terminable under the terms of the trust agreement on the death of the decedent. As a result, the full value of the mortgage note is still includable in Sandy Grossinger's gross estate.
We agree with the Tax Court. There is no doubt that the decedent's share of the mortgage note receivable is includable in his estate under either Internal Revenue Code § 2033 (property in which decedent had an interest) or § 2041 (power of appointment). 26 U.S.C. §§ 2033, 2041 (1976). The only question concerns the exclusion of a portion thereof for payments to Freda. The intra-family agreement of August 27, 1963, did not result in a completed gift or constitute a valid declaration of trust. And while the trust of April 8, 1965, did effect a completed gift, it was only of an annuity for the shorter of Sandy's and Freda's lives.
As to the intra-family agreement of August 27, 1963, it was not a completed gift within Section 2511 of the I.R.C.*fn6 and its supporting regulations, 26 C.F.R. § 25.2511-2(b).*fn7 While a donor may effect a completed, present gift of a future interest, N.Y. Est. Powers & Trusts Law § 6-5.1 (McKinney 1967), including a contingent one, Clowe v. Seavey, 208 N.Y. 496, 102 N.E. 521 (1913), the agreement of August 27, 1963, did not constitute an "irrevocable assignment" within the gift tax regulations,*fn8 so as to result in a completed gift. At most it was a promise, unenforceable by anyone, to make a gift in the future. Sussman v. Sussman, 61 A.D.2d 838, 839, 402 N.Y.S.2d 421, 422-23 (1978), aff'd, 47 N.Y.2d 849, 392 N.E.2d ...