## Facts

- A 72-year-old taxpayer transferred 3,000 shares of stock (about $571,000) to an irrevocable trust.
- Trust income was payable to the taxpayer’s wife (age 44) for life.
- On the wife’s death, the trust corpus would return to the taxpayer if he was then living.
- If the taxpayer predeceased his wife, the corpus would pass to persons the wife appointed by will, or, failing appointment, to her intestate successors under New York law.
- The government assessed gift tax on the full value of the trust principal; the taxpayer paid under protest and sued for a refund.
- The parties treated the transfer as involving three interests: the wife’s life estate, a remainder to the wife’s appointees/heirs if the taxpayer died first, and a reversion to the taxpayer if he survived his wife.

## Issues

1. Whether the trust’s contingent remainder interest (to the wife’s appointees or heirs if the donor predeceased her), reduced by the actuarial value of the donor’s reversion, was a completed transfer taxable under the federal gift tax.
2. Whether potential future inclusion of the property in the donor’s gross estate precluded current gift taxation of the remainder interest.

## Decision

- The Supreme Court affirmed the court of appeals.
- The wife’s life estate was a taxable gift (conceded by the taxpayer).
- The donor’s retained reversionary interest (if he survived his wife) had actuarial value and was not taxed as a gift (conceded by the government).
- The remainder interest, minus the actuarial value of the donor’s reversion, was a completed transfer subject to gift tax.

## Legal Principles

- The federal gift tax reaches “every transfer of property by gift,” including transfers in trust and economically meaningful contingent interests.
- A donor makes a completed gift when the transfer is irrevocable and the donor retains no present power to revoke, alter, or control beneficial enjoyment; a retained reversion conditioned only on survival does not, by itself, prevent completion.
- When a donor retains an actuarially measurable reversionary interest, the taxable gift includes the transferred interests other than that retained reversion (i.e., remainder value is taxed net of the reversion’s value).
- The possibility that transferred value may later be included in the donor’s gross estate does not bar gift taxation; the gift tax may operate in coordination with the estate tax and is not invalidated as “double taxation” on that ground.

## Conclusion

An irrevocable trust that gives a spouse a life estate and provides that the corpus passes to others if the donor dies first effects a completed taxable gift of the remainder interest, reduced by the actuarial value of the donor’s retained reversionary interest, even if the property may later be subject to estate tax.


Smith v. Shaughnessy, 318 U.S. 176 (1943)