Myra B. Robinson, Petitioner, v. Commissioner of Internal Revenue, Respondent, 675 F.2d 774 (5th Cir. 1982)

The husband of a Texas-domiciled taxpayer died in 1972, leaving a will that required his wife, as a condition of taking under the will, to elect to let his will direct the disposition of her share of the community property. The wife elected to take under the will, and, accordingly, she placed her share of the community property in a trust, reserving the income for life and retaining a power of appointment that permitted her to make gifts to her children, the surviving spouse of any deceased child, or to charity. Four years later the wife released the retained power of appointment. The Tax Court held that this release constituted a taxable gift of the remainder interest of the trust, and we affirm.

The taxpayer, Myra B. Robinson, is the widow of G. R. Robinson, who died testate in 1972. The Robinsons had during their marriage accumulated a considerable amount of property. Under Texas community property law, Mrs. Robinson was the owner of a present, vested one-half interest in the property acquired during the marriage.¹  When her husband died in 1972, her interest in their community property was not part of his gross estate for federal estate tax purposes.²  Texas law, however, permits the husband to make a conditional bequest to his wife, putting her to the election of allowing him to direct in his will the disposition of her share of the community property. Estate of Vardell v. Commissioner, 307 F.2d 688, 690 n.2 (5th Cir. 1962) ("The doctrine of election by the surviving spouse where the will deals with the entire community estate is well established under Texas law.").

Under the provisions of her husband's will, Mrs. Robinson was offered the choice of either accepting the benefits provided for her in the will and permitting the provisions of the will to control the disposition of her share of the community property, or receiving only a specific bequest of personal effects if she retained her one-half interest in the community property. Mrs. Robinson filed a timely election to take under the provisions of the will. Thereafter, her husband's executors transferred her share of the community property to a trust known as the "Myra B. Robinson Trust" (the "W trust") and the assets of her husband's estate, except his separately bequeathed personal effects, to a trust known as the "G. R. Robinson Estate Trust" (the "H trust"). Mrs. Robinson was to receive all of the net income from the W trust, plus an annuity from the H trust in the amount of four percent of its initial value, after deduction of debts, taxes and administrative expenses.

Under the W trust, in conformity with the will's provisions, Mrs. Robinson received the income for life, and she had the power to appoint during her life any part of the trust assets to any one or more of the children born of her marriage to G. R. Robinson, or to the surviving spouse of any deceased child, in such proportion as she might see fit. In addition, she had the power to appoint any part of the W trust during her life or by will to charity, in such proportion as she might see fit.³  On March 26, 1976, Mrs. Robinson released her power of appointment under this clause of the will. The value of the corpus of the W trust was then $881,601.38.

The Commissioner determined that Mrs. Robinson's release of her power of appointment was a taxable gift of the remainder interest in the trust to the remaindermen named in the will of her husband. The Commissioner computed the value of this gift, based on Mrs. Robinson's age, to be $276,717.04.⁴  Mrs. Robinson received no consideration for this 1976 release, so the entire value of the remainder interest at that time was treated as a taxable gift.

After the Commissioner issued a notice of gift tax deficiency, Mrs. Robinson petitioned the Tax Court for a redetermination of her gift tax liability. The Tax Court, 75 T.C. 346 (1980), held that (1) the 1976 release constituted a taxable gift, (2) the value of the gift was not reduced under I.R.C. § 2512(b) by the interest Mrs. Robinson received in her husband's property in 1972, and (3) the powers held by Mrs. Robinson as trustee after her renunciation of the power of appointment did not give her sufficient dominion and control over the remainder interest in the W trust to render the gift incomplete. On this appeal from the Tax Court's decision, Mrs. Robinson does not challenge the third holding.

Whether or not Mrs. Robinson received a quid pro quo from her husband's bequest, her 1972 transfer of her interest in the marital community property to the W trust was not a completed gift to the remaindermen at that time because Mrs. Robinson retained "the power to name new beneficiaries or to change the interests of the beneficiaries as between themselves." Treas.Reg. § 25.2511-2(c)⁵  "There can be no completed gift before the donor surrenders dominion and control of the subject matter of the gift." 4 J. Rabkin & M. Johnson, Federal Income, Gift and Estate Taxation § 51.04B(1) (1982).

Although the parties stipulated in the Tax Court that the value of whatever Mrs. Robinson surrendered as a result of her election to take under her husband's will was less than the value of what she received under the will,⁶  we do not rest our finding that there was no taxable gift in 1972 on I.R.C. § 2512(b).⁷  If there was no taxable gift by Mrs. Robinson because she did not relinquish complete dominion and control over the trust property in 1972, I.R.C. § 2512(b), the section entitled, "Valuation of Gifts," cannot be applicable. Nor is Mrs. Robinson entitled under § 2512 to any reduction in her 1976 gift tax liability for consideration received in 1972. Mrs. Robinson did receive an income interest in the H trust when she transferred her share of the community property to the W trust in 1972, but she received no consideration for her release of the power of appointment in 1976. The consideration received by Mrs. Robinson in 1972 does not diminish her gift tax liability for the wholly gratuitous release in 1976.

Therefore, the release by Mrs. Robinson of her power to change the beneficiaries and their relative portions of the remainder of the W trust in 1976 marked the cessation of her dominion and control over the remainder of the trust and constituted a taxable gift. In an early case interpreting the gift tax laws, the Supreme Court reached a similar result. In Burnet v. Guggenheim, 288 U.S. 280, 53 S. Ct. 369, 77 L. Ed. 748 (1933), the Court held there was a taxable gift when the settlor of a trust who had reserved a power of revocation canceled the power. "If a revocable deed of trust is a present transfer by gift," the Court said, "there is not another transfer when the power is extinguished. If there is not a present transfer upon the delivery of the revocable deed, then there is such a transfer upon the extinguishment of the power. There must be a choice, and a consistent choice, between the one date and the other. Id. at 285, 53 S. Ct. at 370, 77 L. Ed. at 750. The Court concluded, "(t)o lay the tax at once, while the deed is subject to the power, is to lay it on a gift that may never become consummate in any real or beneficial sense. To lay it later is to unite benefit with burden. We think the voice of Congress has ordained that this be done." Id. at 288, 53 S. Ct. at 372, 77 L. Ed. at 753. The Supreme Court reaffirmed this holding in Sanford's Estate v. Commissioner, 308 U.S. 39, 43, 60 S. Ct. 51, 56, 84 L. Ed. 20, 22-23 (1939), stating "a retention of control over the disposition of trust property, whether for the benefit of the donor or others, renders the gift incomplete until the power is relinquished whether in life or at death."

Mrs. Robinson was the transferor of her share of the marital community property to the W trust. She was the settlor or creator of that trust and reserved a life income interest for herself and the special power of appointment over the remainder interest. Mrs. Robinson's retained power to appoint the remainder of the W trust was in legal effect a power to alter or amend the trust and not a power to appoint. Treas.Reg. § 25.2514-1(b) (2), provides that "the term 'power of appointment' does not include powers reserved by a donor to himself."⁸  As Professor Johanson has noted, "(s) ince the wife is regarded as the transferor of her share of the community property, her invasion power would be a reserved grantor power,"⁹  hence of course rendering the gift incomplete.

If the power had not been created by Mrs. Robinson (or reserved by her for herself), it would have been a special power of appointment,¹⁰  the release of which would not have been a taxable gift.¹¹  However, the power was created and held by her and it is not to be treated like a special power of appointment created by a donor and given to her.

Finally, Mrs. Robinson argues that the remainder interest in the W trust, over which she had a power of appointment,¹²  would not have been included in her taxable estate at her death if the power had not been exercised, and that, therefore, its surrender during her life should not be taxable as a gift. Although Mrs. Robinson is correct in urging that the estate and gift tax laws are to be applied in pari materia,¹³  we hold that the major premise of her argument is incorrect. The corpus of the W trust would have been included in Mrs. Robinson's gross estate had she died without releasing her power of appointment.¹⁴  In Sanford's Estate v. Commissioner, 308 U.S. 39, 43-44, 60 S. Ct. 51, 56, 84 L. Ed. 20, 22-23 (1939), the Supreme Court held,

a transfer of property upon trust, with power reserved to the donor either to revoke it and recapture the trust property or to modify its terms so as to designate new beneficiaries other than (herself) is incomplete and becomes complete so as to subject the transfer to death taxes only on relinquishment of the power at death.

Indeed, I.R.C. § 2036(a) (2) requires inclusion in the gross estate of "the value of all property to the extent of any interest therein of which the decedent has made a transfer (except in the case of a bona fide sale for an adequate and full consideration in money or money's worth), by trust or otherwise under which he has retained for his life ... the right ... to designate the persons who shall possess or enjoy the property or the income therefrom."¹⁵  In addition, I.R.C. § 2038 requires inclusion of "the value of all property ... (t)o the extent of any interest therein of which the decedent has at any time made a transfer (except in case of a bona fide sale for an adequate and full consideration in money or money's worth), ... where the enjoyment thereof was subject at the date of death to any change through the exercise of a power ... by the decedent ... to alter, amend, revoke, or terminate." See Estate of Vardell v. Commissioner, 307 F.2d 688, 691 (5th Cir. 1962) (the community interest of the decedent would have been included in her gross estate because the "transfer by her to the remaindermen was not completed until her death" under either I.R.C. § 2036 or I.R.C. § 2038).¹⁶ 

As a corollary to her argument based on an analogy to the estate tax laws, Mrs. Robinson urges that, even if the remainder interest in the W trust would be included in her estate at death, she would be entitled to the benefits of either the bona fide sale exceptions of § 2036 and § 2038, or the consideration offset in I.R.C. § 2043(a).¹⁷  Therefore, Mrs. Robinson urges that the dominion and control provision of the estate tax laws do not dictate the determination of estate tax liability when adequate and full consideration was received at an earlier time for the interest now attempted to be included in the estate, relying on Estate of Vardell v. Commissioner, 307 F.2d 688, 694 (5th Cir. 1962). We there applied I.R.C. § 2043(a) "to permit credit for what (the widow) received in consideration of the transfer of the remainder in her community as against the value at her death of the property transferred." Thus, according to Mrs. Robinson, even if she made a gift in 1976 because of the release of her power of appointment over the remainder in the W trust, she should have no gift tax liability because, as the parties stipulated, she received more property in 1972 than she gave up by reason of her election to take under the will.

This argument, however, misperceives the relationship between I.R.C. § 2043(a) and I.R.C. § 2512(b). I.R.C. § 2043(a) provides that, if a transfer is not a bona fide sale for adequate and full consideration, "there shall be included in the gross estate only the excess of the fair market value at the time of death ... over the value of the consideration received therefor by the decedent." The provision requires the valuation of the consideration received by the decedent at the time the decedent made the transfer, a time that necessarily predates the decedent's death. Sections 2036(a) and 2038(a) also look to a time prior to the laying of the estate tax to determine if the transfer, at the time it was made, was for adequate and full consideration.¹⁸  These provisions were the basis for our allowance of the offset in Estate of Vardell, supra.

The gift tax, however, does not "value (the property) at a moment of time antecedent to the time when the gift became complete." Goodman v. Commissioner, 156 F.2d 218, 219 (2d Cir. 1946). Section 2512(b) implies that the consideration received at the moment of transfer of the property is the consideration to be measured.¹⁹  "(T)he statute and applicable Treasury Regulations impel the conclusion that taxable value for gift tax purposes is the value of the gift to the donor at the moment it is made." Goodman, 156 F.2d at 219 (emphasis added). In 1976, when the gift was made, Mrs. Robinson received no consideration. We cannot look to 1972 to find consideration for a wholly gratuitous release of a power four years later. We imply no opinion concerning whether, having released her power over the remainder, the value of the remainder interest in the W trust included in Mrs. Robinson's estate will be offset by consideration received in 1972. That question is not now before us.²⁰ 

Mrs. Robinson's release of her power of appointment in 1976 fixed the rights of the remaindermen and thus vested in them irrevocably what could otherwise have been snatched from them by a whim. It literally completed what had before been inchoate, a mere hope. It is this completed transfer that constitutes the taxable event under the federal gift tax statute.

The decision of the Tax Court is AFFIRMED.