1. Irrevocable trusts for the benefit of minors provided for
accumulation of the income from each beneficiary's share until he
reached the age of 21, for payment of the income thereafter during
his lifetime, and for ultimate distribution of the corpus
contingently. The trustees were authorized to apply, during the
minority of any beneficiary, so much of the income from his share
"as may be necessary" for his support, education, and comfort, and
to expend up to 10% of the corpus in an "emergency."
Held: that gifts to the trusts were of "future
interests," within the meaning of § 504(b) of the Revenue Act of
1932 and applicable Treasury Regulations, so that, in computing the
gift tax, the $5,000 exclusion prescribed by that section was not
allowable.
Fondre v. Commissioner, 324 U. S.
18. P.
325 U. S.
447.
2. A taxpayer claiming benefit of the 5,000 exclusion in
computing a gift tax under § 504(b) of the Revenue Act of 1932 has
the burden of showing that the gift to which the claim relates was
not of a "future interest." P.
325 U. S.
449.
3. In computing the gift tax pursuant to the formula prescribed
by § 502 of the Revenue Act of 1932, an adjustment may be made in
the net gift figure for an earlier year, even though assessment and
collection of a gift tax for such earlier year be barred by
limitations. P.
325 U. S.
449.
144 F.2d 115 reversed.
Certiorari, 324 U.S. 832, to review the reversal of a decision
of the Tax Court which sustained the Commissioner's determination
of deficiencies in gift taxes.
Page 325 U. S. 443
MR. JUSTICE RUTLEDGE delivered the opinion of the Court.
This case, like
Fondren v. Commissioner, 324 U. S.
18, presents questions whether certain gifts to minors
are gifts of "future interests in property," within the caning of
the Revenue Act of 1932, c. 209, 47 Stat. 169.
In 1936, the respondent, William D. Disston, created a trust for
the benefit of each of his five children, three of whom were then
minors. The total of his gifts that year was $71,952. The
Commissioner allowed an exemption of $5,000 on each gift for the
children and on one to his wife. The taxpayer also was allowed the
specific exemption of $40,000 provided by § 505 of the Revenue Act
of 1932, as amended by § 301(b) of the Revenue Act of 1935. The net
gifts for 1936 accordingly were computed to be $1,952, upon which a
tax was assessed and paid.
In 1937, the taxpayer added to the corpus of the trust
securities valued at $25,000, of which $5,000 was allocated to each
child's interest, including the three who were still minors. In
1938, he created another trust for his five children, the corpus
consisting of undeveloped land worth $38,581. Two of the children
still were minors.
The two trusts were identical in all respects now material. The
principal was divided into five equal shares, one for each child.
The trusts were of the spendthrift variety. All shares of the
corpus and income were to be free from "anticipation, assignment,
pledge, or obligations of beneficiaries," as well as execution or
attachment. The shares of the minors alone are now involved. Hence,
the nature of the trust as applicable to them only need be
considered.
The taxpayer's son, William L. Disston, was nineteen in 1936
when the first trust was created. As to his share the trustees were
directed, in the Second Article,
"to accumulate the net income therefrom for the benefit of
William L. Disston until he reaches the age of twenty-one years, at
which time to pay over to him all accumulated income,
Page 325 U. S. 444
and thereafter to pay over to him in not less than quarterly
instalments the entire net income derived therefrom during his
lifetime; provided, however, that, upon his reaching the age of
forty-five years, one-half of the principal of his share shall be
paid over to him free and discharged of all trusts, and upon
further trust upon his death whether before or after reaching the
age of forty-five years, to divide the principal of his share, or
such portion thereof as is then held by the Trustees, among his
then living descendants . . . in such amounts as he shall by will
appoint, and in default of such appointment, to divide the same
equally per stirpes,"
with provision for division among the taxpayer's other children
and their descendants if no descendant of the beneficiary should
then be living. The Article contains a proviso that, if the
taxpayer's son should die before reaching forty-five, the son may
appoint to his spouse for a period no longer than her life not more
than one-half of the income from his share of the corpus.
Identical provisions were made for the two minor daughters,
except that they were to obtain only one-third of the corpus at age
forty-five, and could appoint to their spouses only one-third of
the income.
A subsequent paragraph provided that the trustees should hold
the minors' shares during their respective minorities,
"and during such time shall apply such income therefrom as may
be necessary for the education, comfort and support of the
respective minors, and shall accumulate for each minor until he or
she reaches the age of twenty-one years, all income not so needed.
The foregoing clause shall apply to minor children of the Settlor
irrespective of the direction heretofore set forth to accumulate
all income for such minors."
In addition the Fourth Article, which defined the trustees'
powers, authorized them
"[t]o apply the income to which any beneficiary shall be
entitled hereunder for the
Page 325 U. S. 445
maintenance, education, and support of such beneficiary should
he or she, by reason of age, illness, or any other cause, in the
opinion of the Trustees, be incapable of dispensing it. Payment by
the Trustees to the parent of any minor . . . shall be sufficient
acquittance and discharge to the Trustees for such payment or
payments."
Finally, the trustees were authorized to invade the corpus in an
emergency:
"To expend out of the share of principal from which any
beneficiary may be receiving income under this deed of trust such
sums as Trustees may consider to be for the best interests of such
beneficiaries during illness or emergency of any kind; provided,
however, that in no case shall such expenditures of principal
exceed in the aggregate ten percent (10%) of the value of such
share of principal. . . ."
In operation, the 1938 trust of unimproved realty had produced
no net income to the time the case came before the Tax Court. Most
of the 1936 income of the first trust, $288 for each minor, was
paid to the mother of the beneficiaries. In 1937, partial payments
of income, $94 per minor child, were made. The beneficiaries'
mother returned other checks to the corporate trustee in 1937, and
one of the individual trustees, an adult child of the taxpayer,
directed the corporate trustee thereafter to accumulate the income
of the minors. No further payments of income were made to any child
prior to his becoming of age.
In determining the taxpayer's gift tax for 1937, the
Commissioner disallowed three $5,000 exclusions from the net gifts
for that year on the ground that the gifts to the three minor
children were gifts of future interests. For 1938, the Commissioner
disallowed two $5,000 exclusions on the ground that the gifts made
that year to the two children who were still minors were gifts of
future interests.
In computing the gift tax for 1937 and 1938, it was necessary
for the Commissioner to compute the aggregate
Page 325 U. S. 446
sum of the net gifts for the preceding years. [
Footnote 1] The Commissioner, in determining
the net gifts made for this purpose by the 1936 trust, adjusted the
exclusions which he had allowed in 1936 to the extent of $5,000 for
each of the three minors. The period of limitations for assessment
and collection of 1936 gift taxes had run. [
Footnote 2]
The Tax Court upheld the Commissioner, but the Court of Appeals
reversed, holding no future interests arose as a result of the
gifts to the minors. Consequently it was unnecessary for the Court
of Appeals to consider whether the statute of limitations barred
readjustment of the net gift figure for 1936, or simply barred
collection of any further gift taxes for that year.
The guiding principles were outlined recently in
Fondren v.
Commissioner, 324 U. S. 18. Gifts
of "future interests," within the meaning of § 504(b), to any
person are not excluded from the computation of net gifts to the
extent of the first $5,000 in value, as are present interests.
Treasury Regulations 79 (1936 ed.), Article 11, defines "future
interests" as interests "limited to commence in use, possession, or
enjoyment at some future date or time. . . ." The definition has
been approved repeatedly.
Cf. Ryerson v. United States,
312 U. S. 405;
United States v. Pelzer, 312 U. S. 399;
Fondren v. Commissioner, 324 U. S. 18.
Page 325 U. S. 447
Clearly, the corpus of the trusts falls within the definition.
Distribution to William L. Disston, for example, has no relation to
his reaching his majority, which he has now attained. He must live
to attain the age of forty-five to enable him to receive one-half
of the corpus. If he does not reach that age, his estate receives
no part of the principal. The recipients are an undetermined group
designated in the trust provision, among whom the beneficiary has a
limited power of appointment. At the time of the gifts in
1936-1938, it was unknown who, in fact, would receive this one-half
interest. Obviously the enjoyment was postponed.
As to the other half in William L. Disston's share, it likewise
was unknown who would enjoy the corpus. One thing only was known --
that the named child could not enjoy it. He would continue to
receive the income from it for his life, but the principal was not
given to him. The possibility that, in an emergency, the trustees
might invade the corpus to the extent of ten percent for his
benefit did not confer a present interest in that part of the
principal. The emergency, by definition, was extraordinary,
something that might or might not occur at some indefinite future
time. No present, certain, and continuous enjoyment was
contemplated, nor did it materialize. What has been said of the one
minor is true of the others.
The question must be determined whether the trusts provided for
a present interest in the trust income, or some definable portion
of it. The first direction of each trust is to accumulate the net
income until the minor reaches twenty-one. If that were all, it
would again be clear that a future interest was created by the
postponement of enjoyment. A later paragraph directs the trustees,
however, "to apply . . . such income therefore as may be necessary
for the education, comfort and support of the respective minors."
and to accumulate the remainder.
Page 325 U. S. 448
Respondent urges that this case differs from the
Fondren case in that there the trust instrument showed
that it was not contemplated that the income would be needed for
education and support, and the trustee was directed to accumulate
the income unless no other funds were available for such purposes,
whereas here, there is nothing in the trust instrument to indicate
such an intent. In fact, respondent argues, the trust instrument
means that the trustees must apply an amount of the income
sufficient to provide for education, comfort, and support even
though the minor is amply cared for by his parents, his own
efforts, or other sources of revenue, citing 1 Scott, Trusts, §
128.4 and other authorities. When faced with the fact that the
history of the trust's administration shows a practical
construction by the trustees that support money need not
automatically be paid over, respondent urges that the terms of the
trust and the nature of the interest granted cannot be varied by
what was subsequently done in administration.
The language of the trust instruments directs that the income be
accumulated during minority. The subsequent provision for payments
for maintenance and support may be said to indicate a departure
from the policy of accumulation only when necessary, in the
reasonable discretion of the trustees. If that is the appropriate
interpretation of the trust instruments, then little difference
from the
Fondren case is involved. Even in its practical
working, the trustees did not find the necessary prerequisites for
a steady application of all or any ascertainable part of the income
for education, support, and maintenance.
But, even though the trustees were under a duty to apply the
income for support, irrespective of outside sources of revenue,
there is always the question how much, if any, of the income can
actually be applied for the permitted purposes. The existence of a
duty so to apply the income gives no clue to the amount that will
be
Page 325 U. S. 449
needed for that purpose, or the requirements for maintenance,
education, and support that were foreseeable at the time the gifts
were made. In the absence of some indication from the face of the
trust or surrounding circumstances that a steady flow of some
ascertainable portion of income to the minor would be required,
there is no basis for a conclusion that there is a gift of anything
other than for the future. The taxpayer claiming the exclusion must
assume the burden of showing that the value of what he claims is
other than a future interest.
Cf. New Colonial Ice Co. v.
Helvering, 292 U. S. 435.
That burden has not been satisfied in this case.
The question remains whether the adjustment of net gifts for
1936 in computing 1937 and 1938 tax liability is barred by the
statute of limitations. As has been noted, § 502 requires
utilization of "the aggregate sum of the net gifts . . . for each
of the preceding calendar years" in the formula for computing gift
tax liability. Section 517(a) does not purport to bar adjustment of
the net gift figure for that purpose, but simply prevents
assessment and collection of a tax for a year barred by the
statute. The statute does not support to preclude an examination
into events of prior years for the purpose of correctly determining
gift tax liability for years which are still open. The Tax Court
and Treasury Regulations have construed § 517(a) as requiring
determination of the true and correct aggregate of net gifts for
previous years. [
Footnote 3]
The construction is in accord with the statutory language.
Accordingly, the judgment.
Reversed.
[
Footnote 1]
The formula results in a progressive rate of gift taxation not
limited to progression within the calendar year, but extending over
the life of the donor. The computation formula is set forth in §
502 of the Revenue Act of 1932:
"The tax for each calendar year shall be an amount equal to the
excess of --"
"(1) a tax, computed in accordance with the Rate Schedule
hereinafter set forth, on the aggregate sum of the net gifts for
such calendar year and for each of the preceding calendar years,
over"
"(2) a tax, computed in accordance with the Rate Schedule, on
the aggregate sum of the next gifts for each of the preceding
calendar years."
[
Footnote 2]
See § 517(a) of the Revenue Act of 1932.
[
Footnote 3]
The pertinent Treasury Regulations 79, Article 5 provides:
". . . By the words 'aggregate sum of the net gifts for each of
the preceding calendar years' (aside from the amount of the
specific exemption deductible) is meant the true and correct
aggregate of such net gifts, not necessarily that returned for such
years and in respect to which tax was paid. . . ."
See also Winterbotham v. Commissioner, 46 B.T.A. 972;
Wallerstein v. Commissioner, 2 T.C. 542;
Roberts v.
Commissioner, 2 T.C. 679.