1. Irrevocable trusts for the benefit of minors provided for
distribution of specified percentages when the beneficiaries
reached the ages of 25 and 30 and of the remainder when they
reached 35. The trustee was authorized to apply income and corpus
toward maintenance and education of the beneficiaries if, contrary
to expectations, necessity therefor should arise.
Held,
that gifts to the trusts were gifts of "future interests in
property," within the meaning of § 504(b) of the Revenue Act of
1932 and Treasury Regulations 79, so that the $5,000 exclusion
prescribed by that section was not allowable. P.
324 U. S.
24.
2. To bring the statutory exclusion into force, it is not enough
that the donee has acquired vested rights; he must have the right
presently to use, possess, or enjoy the property. P.
324 U. S.
20.
3. The fact that the beneficiary is specified and
in
esse, or that the amount of the gift is definite and certain,
does not render the statutory exclusion applicable where enjoyment
of the property is postponed. P.
324 U. S.
26.
4. Section 504(b) makes no distinction between gifts for the
benefit of minors and gifts to adults. P.
324 U. S.
28.
5. It does not follow from the result here reached that the
statutory exclusion would not be applicable in any case to gifts
for the benefit of minors. P.
324 U. S.
29.
6. A settled construction of a statute which Congress has
reenacted should be followed. P.
324 U. S.
29.
141 F.2d 419 affirmed.
Certiorari, 323 U.S. 685, to review the affirmance of a decision
of the Tax Court, 1 T.C. 1036, sustaining the Commissioner's
assessment of a deficiency in gift taxes.
Page 324 U. S. 19
MR. JUSTICE RUTLEDGE delivered the opinion of the Court.
In 1935, 1936, and 1937, petitioner, Ella F. Fondren, and her
husband, since deceased, created seven separate irrevocable trusts,
each in favor of a grandchild of tender years, and each of them
made gifts to each trust of corporate stock having the fair market
value of $5,975. The donors made gift tax returns for 1937,
claiming the statutory exclusion of $5,000 for each gift, and
accordingly reported taxable gifts for each trust of $975. Gift
taxes were paid on this basis.
The Commissioner made deficiency assessments, disallowing the
exclusions on the ground that the gifts were of "future interests
in property" within the meaning of the Revenue Act of 1932, c. 209,
47 Stat. 169, and Treasury Regulations 79 (1936 ed.). [
Footnote 1] The Tax Court upheld the
Commissioner, the cases being consolidated for hearing and
decision. 1 T.C. 1036. The Circuit Court of Appeals affirmed the
Tax Court's decision, one judge dissenting. 141 F.2d 419.
Certiorari was granted, 323 U.S. 685, because of the importance of
the question as affecting
Page 324 U. S. 20
the taxability of gifts made for the benefit of minor children
and because of alleged or apparent conflict with decisions of other
courts. [
Footnote 2]
The sole issue is whether the gifts were of "future interests"
within the meaning of the statute and the regulation. The latter
provides:
"Art. 11. . . . 'Future interests' is a legal term, and includes
reversions, remainders, and
other interests or estates,
whether vested or contingent, and whether or not supported by a
particular interest or estate,
which are limited to commence in
use, possession, or enjoyment at some future date or time. . .
."
(Emphasis added.) Upon the facts, the issue turns on whether the
interests acquired by the minor beneficiaries were "limited to
commence in use, possession, or enjoyment at some future date or
time."
Ryerson v. United States, 312 U.
S. 405;
United States v. Pelzer, 312 U.
S. 399.
Under these decisions, it is not enough to bring the exclusion
into force that the donee has vested rights. In addition he must
have the right presently to use, possess, or enjoy the property.
These terms are not words of art, like "fee" in the law of seizin,
United States v. Pelzer, supra, at
312 U. S. 403,
but connote the right to substantial present economic benefit. The
question is of time -- not when title vests, but when enjoyment
begins. Whatever puts the barrier of a substantial period between
the will of the beneficiary or donee now to enjoy what has been
Page 324 U. S. 21
given him, and that enjoyment makes the gift one of a future
interest within the meaning of the regulation.
Accordingly, it has been held that, if the income of a trust is
required to be distributed periodically, as annually, but
distribution of the corpus is deferred, the gift of the income is
one of a present interest, that of the corpus one
in
futuro. Fisher v. Commissioner, 132 F.2d 383;
Sensenbrenner v. Commissioner, 134 F.2d 883.
A
fortiori, if income is to be accumulated and paid over with
the corpus at a later time, the entire gift is of a future
interest, [
Footnote 3]
although, upon specified contingency, some portion or all of the
fund may be paid over earlier. [
Footnote 4] The contingency may be the exercise of the
trustee's discretion, either absolute or contingent. [
Footnote 5] It may also be the need of the
beneficiary, not existing when the trust or gift takes effect
legally, but arising later upon anticipated though unexpected
conditions, either to create a duty in the trustee to pay over or
to permit him to do so in his discretion. [
Footnote 6]
In the light of these principles and decisions, it is necessary
to consider the terms of the trusts and the circumstances
Page 324 U. S. 22
in which the gifts were made. The trust instruments were
substantially uniform except for variations in the names of the
beneficiaries and, in case of death, their successors in interest.
The trusts were irrevocable, the donors retaining no beneficial
interest in the estates. Each instrument named the donor, W. W.
Fondren, as trustee, and Ella F. Fondren, the other donor, as
successor trustee. They reserved the rights as donors to remove any
trustee except Mr. Fondren, and to name successor trustees. Subject
to these reservations and the directions set forth below, the
trustee was given substantially complete control.
The trusts' stated purpose was "to provide for the personal
comfort, support, maintenance, and welfare" of the grandchildren.
But, from the explicit recitals of the instruments, [
Footnote 7] as well as the evidence,
including a stipulation, it is clear that the parents of each child
were so situated that, when the gifts were made, they were fully
able to provide for and educate him. And, from the same recitals,
it is clear there was little reason to believe that any parent
would not continue so until the child's majority. Accordingly, in
each instance, the trust was to continue until the child should
attain the age of thirty-five. Hence, also the income was to be
accumulated, except upon the contingencies specified below, and
each beneficiary was to receive 25 percent of the corpus and
accumulations at age twenty-five, 33 1/3 percent at age thirty, and
the remainder at age thirty-five.
Aware of the uncertainties of our world, however, the donors
directed in Article 3:
". . . [T]he Trustee shall provide for the support, maintenance
and education of our said Grandson, using only the income of said
estate for the purpose if it be sufficient. If it be necessary to
use any of the corpus of
Page 324 U. S. 23
the estate for that purpose
and, in the judgment of the
Trustee, it is best to do so, said Trustee
may make
advancements out of the corpus of said trust estate for such
purpose for the benefit of our said Grandson."
"It is contemplated, however, that our said Grandson will have
other adequate and sufficient means of support, and that it will
not be necessary to use either the income or the corpus of the
trust estate hereby created to properly provide for his education,
maintenance, and support, and, if the income from the trust estate
be not needed for these purposes, then all of the income from said
trust estate not so needed shall be by the Trustee passed to
capital account of said trust estate, and shall be and become a
part of said trust estate, it being our hope that all of the
earnings and income of said trust estate during the period of this
trust may be used to augment the trust estate and be delivered to
our said Grandson at the periods herein provided for.
It is
expressly provided, however, that our said Grandson shall be
properly maintained, educated, and supported, and
if it be
necessary to use all of the income and even all of the corpus
of the trust estate hereby created and all augmentations thereof,
it shall be the duty of the Trustee to see that this obligation
shall be properly and reasonably discharged. . . ."
(Emphasis added)
In view of the apparently conflicting terms of this article for
use of the corpus, the exact scope of the trustee's discretion is
by no means clear. But this need not be determined. Whether the
disposition is in his judgment entirely, as the first clause
indicates, or, under the second, is so only with reference to how
much of the fund may be needed, [
Footnote 8] the trustee cannot act in any case to
apply
Page 324 U. S. 24
corpus or income for the support, maintenance, and education of
the beneficiary until necessity arises.
Under the particular facts, this requirement is important in two
respects. It is, as petitioners urge, a limitation upon the
trustee's discretion. His power is not unconfined. Even though the
existence and amount of need may be, in the first instance, for his
determination, it does not follow that, need existing, the trustee
arbitrarily could refuse to make the application. The case
therefore is not one in which present enjoyment is dependent upon
an exercise of the trustee's absolute discretion.
But this does not show, as petitioners seem to think, that the
minor beneficiaries had, at the moment of the gift, a present right
of enjoyment. It rather shows the contrary -- that their right was
not absolute and immediate, but was conditioned, during minority
and afterward until the times specified for distribution, upon a
contingency which might never arise. That contingency, by the
explicit terms of the trust, was the existence of need which was
then nonexistent, and, in the stated contemplation of the donors,
was not likely to occur in the future -- at any rate, during the
child's minority. The circumstances surrounding the donors and the
donees confirm these recitals. The case is one, therefore, in which
the gift, if presently vested, made enjoyment contingent upon the
occurrence of future events not only uncertain, but, by the
recitals of the instrument itself, improbable of occurrence. The
gifts consequently
Page 324 U. S. 25
were of "future interests in property" within the meaning of
Section 504(b).
Petitioners' contrary argument, apart from the misconception
that legal vesting of the interest, without more, satisfies the
statute, [
Footnote 9] rests
chiefly upon considerations arising from the legislative history
and from the fact that gifts for the benefit of children under
legal disability to manage their own property must make provision
for its control by trustees or otherwise.
Special stress is placed on the fact that each gift was made to
or for the benefit of a specifically named beneficiary then
in
esse, and for a definite amount. As the
Pelzer
opinion noted, 312 U.S. at
312 U. S. 403, the committee reports recommending the
legislation stated:
"The exemption being available only insofar as the donees are
ascertainable, the denial of the exemption in the case of gifts of
future interests is dictated by the apprehended difficulty,
in
many instances, of determining the number of eventual donees
and the values of their respective gifts. [
Footnote 10]"
(Emphasis added.) And, in the
Pelzer case, the Court
found that the gift involved these difficulties, as well as
postponement of enjoyment to the happening of a future uncertain
event, since the right of enjoyment was contingent, in any event,
upon the beneficiaries' surviving the ten-year period specified for
accumulation of income. 312 U.S. at
312 U. S.
404.
Page 324 U. S. 26
Both conclusions would seem applicable in this case, the chief
difference being that the period of postponement, which the
beneficiaries must survive before enjoyment begins is indefinite,
rather than for a specified time. That is true in any case where
the length of the period is governed by a contingency. But the
regulation, adopted almost in the language of the committee
reports, [
Footnote 11] does
not limit the denial of the exception to instances where the
deferment of enjoyment is, at all events, for a period which is
definite and certain.
Cf. Commissioner v. Glos, 123 F.2d
548, 550. Clearly, the statute is not to be applied differently, to
grant or deny the exemption, if there is postponement, merely
because, in one case, the period is, under any eventuality, for a
certain specified length of time, whereas, in another, it is of
uncertain or indefinite length. The important thing is the
certainty of postponement, not certainty of the length of its
duration.
Furthermore, if there is postponement, the exemption is denied
whether or not the administrative difficulties anticipated in the
committee reports inhere in the particular gift.
Commissioner
v. Glos, supra; Welch v. Paine, 120 F.2d 141. Those reports
specifically state these difficulties are present "in many
instances." But they also state that
"the term 'future interests in property' refers to any interest
or estate, whether vested or contingent, limited to commence in
possession or enjoyment at a future date. [
Footnote 12]"
They thus contemplate, as does the regulation framed in similar
terms, vested as well as contingent interests and estates. And
there is nothing to indicate that gifts to specified donees
in
esse and in definite amounts are to be excluded from the
denial, if by the terms of the gift enjoyment is deferred to a
future time. Again, the crucial thing is postponement of enjoyment,
not the fact that the
Page 324 U. S. 27
beneficiary is specified and
in esse, or that the
amount of the gift is definite and certain. [
Footnote 13]
The considerations which petitioners advance to support their
position from the minority of the beneficiaries and their
consequent legal disability to manage and control their property
are intermingled with others relating to the motives of the donors
in making the gifts. It is said that their purpose was to provide
for the "comfort, support, maintenance and welfare," including
education, of the grandchildren; that the latter were incapable of
taking over the management and control of the property; that,
accordingly, it was necessary for some arrangement to be made for
vesting this power in trustees or others capable of exercising it;
that the trustees were given no power to withhold either income or
corpus in case of need, and, consequently, the whole fund became
available to the beneficiary for his maintenance "immediately upon
the consummation of the gift," so that he was vested at once with
the right of present enjoyment as fully as any child of tender
years could be, and in no way differently, taking account of his
disability, than any owner of property by title in fee simple.
Page 324 U. S. 28
So far as the argument turns on the motive of the donors, it may
be answered that the statute and the regulation make no such test.
If motive has bearing, it is only by reason of its effect upon the
element of time and whatever relation may be given, by the
particular terms of the gift, to it and the disclosing of a purpose
to provide for or against immediate enjoyment. The statute in this
respect purports to make no distinction between gifts to minors and
gifts to adults. If there is deferment in either case, the
exemption is denied. Consequently in this, case the donors'
laudable desire to make provision for their grandchildren in case
of future need cannot nullify the deferment which the recited
absence of present need, coupled with the terms of the trust,
brought about. Again, contingency of need in the future is not
identical with the fact of need presently existing. And a gift
effective only for the former situation is not effective, for
purposes of relief from the tax, as if the latter were specified,
whether the donee is an adult or a minor.
Upon the facts, furthermore, the trusts hardly can be taken as
designed primarily for the periods covered by the children's
minority. They did not terminate with the ending of that period.
The graduated scale of payments, beginning at age twenty-five and
ending at thirty-five, together with the prohibition of payment
earlier except in case of necessity, shows principal concern for a
period of adult life. And, from the fact that this would be the
period when the grandchildren normally would be assuming family
responsibilities of their own, the inference well might be drawn
that the chief purpose was to give aid and some security in that
time. The contingent provision, in case of earlier need, cannot be
taken, therefore, to represent the donors' primary concern as
expressed in the instruments.
Cf. Fisher v. Commissioner,
132 F.2d 383, 386.
Page 324 U. S. 29
But, whether so or not in the particular circumstances, that
need was but a contingency to be realized, if at all, in the
future. And, until realized, the contingency stood squarely in the
way of any child's receiving a single dollar from the fund.
Finally, it is urged that, unless these gifts are to be taken as
conferring the right to immediate enjoyment, no gift for the
benefit of a child of tender years can be so regarded, since, in
any such case, "some competent person must be the primary judge as
to the necessity and extent of reasonable requirements of the
beneficiary." The argument is appealing insofar as it seeks to
avoid imputing to Congress the intention to "penalize gifts to
minors merely because the legal disability of their years precludes
them for a time from receiving their income in hand currently."
Cf. Disston v. Commissioner, 144 F.2d 115, 119. But we
think it is not applicable in the facts of this case, since, by the
terms of the trusts and the facts recited in the instruments, none
of the fund, whether income or corpus, could be applied immediately
for the child's use or enjoyment.
It does not follow, as petitioners say, that, if the exemption
does not apply in this case, it can apply in no other made for a
minor's benefit. Whenever provision is made for immediate
application of the fund for such a purpose, whether of income or of
corpus, the exemption applies. Whether, in the case of a gift
requiring such an application of the income, but providing for
retention of a corpus no more than reasonably sufficient to produce
the income required for this purpose and to insure its continued
payment during minority, the donation would fall within the
exemption, as to corpus as well as income, is a question not
presented on this record, and therefore not determined.
The regulation has received the construction now reaffirmed with
substantial consistency. The statute, with
Page 324 U. S. 30
the meaning thus settled, has been reenacted by Congress.
[
Footnote 14] The
construction should be followed until Congress sees fit to change
it.
The judgment is
Affirmed.
[
Footnote 1]
The statute is as follows:
"Sec. 504. Net Gifts"
"(a)
General Definition. The term 'net gifts' means the
total amount of gifts made during the calendar year, less the
deductions provided in section 505."
"(b)
Gifts Less than $5,000. In the case of gifts
(other than of future interests in property) made to any person by
the donor during the calendar year, the first $5,000 of such gifts
to such person shall not, for the purposes of subsection (a), be
included in the total amount of gifts made during such year."
The pertinent part of the Regulation is quoted in the text
below.
[
Footnote 2]
The petition alleged conflict with
Smith v.
Commissioner, 131 F.2d 254;
Sensenbrenner v.
Commissioner, 134 F.2d 883, and
Kinney v. Anglim,
D.C.N.D.Cal., 43 F. Supp. 431.
Cf. also Disston v.
Commissioner, 144 F.2d 115. The decision, one judge
dissenting, overruled the prior decision in
Commissioner v.
Taylor, 122 F.2d 714,
cert. denied, 314 U.S. 699. A
petition for writ of certiorari was filed in the
Disston
case on October 12, 1944, and now is pending.
[
Footnote 3]
Welch v. Paine, 120 F.2d 141;
Commissioner v.
Taylor, 122 F.2d 714, 715,
cert. denied, 314 U.S.
699;
Commissioner v. Brandegee, 123 F.2d 58;
Commissioner v. Phillips' Estate, 126 F.2d 851;
Commissioner v. Gardner, 127 F.2d 929;
Welch v.
Paine, 130 F.2d 990;
Commissioner v. Wells, 132 F.2d
405;
French v. Commissioner, 138 F.2d 254;
Roberts v.
Commissioner, 143 F.2d 657;
Howe v. United States,
142 F.2d 310;
Hutchings-Sealy Nat. Bank v. Commissioner,
141 F.2d 422;
Helvering v. Blair, 121 F.2d 945.
[
Footnote 4]
Ibid.
[
Footnote 5]
Welch v. Paine, 120 F.2d 141;
Commissioner v.
Taylor, 122 F.2d 714, 715,
cert. denied, 314 U.S.
699;
Commissioner v. Brandegee, 123 F.2d 58;
Commissioner v. Phillips' Estate, 126 F.2d 851;
Comm'r
v. Gardner, 127 F.2d 929;
Winterbotham v.
Commissioner, 46 B.T.A. 972;
cf. Ryerson v. United
States, 312 U. S. 405,
312 U. S.
408.
[
Footnote 6]
Cf. Authorities cited
note 3 supra.
[
Footnote 7]
Cf. the recitals quoted in the text below.
[
Footnote 8]
Petitioner presents the case as if no discretion whatever were
vested in the trustee as to making the payments over. However, in
the first provision for use of the corpus, such use is authorized
"if it be necessary . . . and in the judgment of the Trustee it is
best to do so;" in the other provision, the duty imposed, "if it be
necessary to use all of the income and even all of the corpus," is
one "to see that this obligation shall be properly and reasonably
discharged." If the first clause limits the second, the trustee's
discretion is bounded only by what he thinks "it is best to do,"
and, in any event, under the latter, his duty is only to see that
the obligation is "properly and reasonably" discharged. Presumably
also, the trustee would have some room for judgment on whether
particular circumstances would amount to necessity, and particular
measures would be required to meet it.
[
Footnote 9]
Several of petitioners' statements of their contentions ignore
the contingency upon which enjoyment is deferred in this case --
namely the occurrence at some future time of the need or necessity
of the beneficiary which would bring the trustee's power or duty to
provide for support or maintenance from the trust fund into play.
It is not necessary to note these contentions specifically further
than to say, in addition to what has been said already, that they
assume as the answer to it the very issue in the case.
[
Footnote 10]
H.Rep. No. 708, 72d Cong., 1st Sess., 29; S.Rep. No. 665, 72d
Cong., 1st Sess., 41.
[
Footnote 11]
Cf. text at
note
12 infra.
[
Footnote 12]
Cf. note 10
supra.
[
Footnote 13]
The absence of these factors is relevant as showing the more
clearly that postponement exists, and, therefore, the exemption
does not apply. Their presence does not show that there is no
postponement, or that the exemption applies. The administrative
difficulties relating to these matters, "in many instances," were
reasons for denying the exemption. They do not, and were not
intended to, encompass the full scope of the denial. As the statute
extended the exemption, "in the specified amount to all gifts,
whether large or small,
made to any person,'" Helvering v.
Hutchings, 312 U. S. 393,
312 U. S. 397,
so it denied the exemption to all gifts, whether large or small,
vested or contingent, made to any person, whether specified and
in esse or ascertainable only in the future, and whether
for a specific or a presently unascertainable amount, if the gift
is one of a "future interest in property" -- that is, one as to
which enjoyment is postponed to some future time.
[
Footnote 14]
Congress withdrew the exclusion, as to gifts in trust, in the
Revenue Act of 1938, c. 289, 52 Stat. 447, § 505, amending § 504(b)
of the 1932 Act. But it was restored, though reduced to $3,000, by
the Revenue Act of 1942, c. 619, 56 Stat. 798, § 454.