Lockard v. Commissioner

Barbara Lockard (plaintiff) had established a trust to support her husband during his life. She revised the trust instruments on December 31, 1941, after first resigning as cotrustee, to assign to the remaining trustee all reversionary interest in the trust. She also directed the trustee to continue from April 1, 1944 to hold the trust property to pay income annually to her husband, Derwood, until his death, and to pay him up to $3,000 in principal each year, based on the trustee’s sole discretion, for Derwood’s comfortable maintenance and support. After Derwood’s death, the principal was to go to Barbara if she was living and, if not, to her executors, administrators, or assigns. The issue was the value of the new gift. Derwood already had the right to receive trust income until March 31, 1944, so the new gift was the right to receive such income from April 1, 1944, for the remainder of his life, plus the right to receive up to $3,000 annually, pursuant to the trustee’s discretion. Derwood was 34 years old in 1941. In her 1941 gift tax return, Barbara valued the new gift at $55,000. The commissioner (defendant) valued the gift at $99,459.37 and found a deficiency of $5,517.39 in gift tax paid. Barbara petitioned for a review. Barbara argued that the trust corpus might never be diminished and that the proper value should be $84,535.90, which was the value of the trust income over the projected remainder of Derwood’s life, with any gifts of principal subject to gift tax when actually distributed. The government argued that by relinquishing the right to have up to $3,000 annually returned to her, Barbara had made a taxable gift of the entire corpus. The United States Tax Court affirmed the commissioner’s decision, and Barbara appealed.