Perkins v. Commissioner , 27 T.C. 601 ( 1956 )

OPINION.

Raum, Judge:

Respondent has determined deficiencies in the gift tax of the petitioners as follows:

George W. Linn M. iear Perkins Perkins

1951_$2,107.69 $2,092.43

1952_ 2, 803.31 2, 871. 73

1953_ 3,538.88 3,604.59

The sole issue is whether certain gifts in trust constituted gifts of future interests, so as to prevent the deduction therefrom in each year of the exclusions otherwise authorized by law.

All of the facts have been stipulated and are so found.

Petitioners are husband and wife temporarily sojourning in Paris, France. They are citizens of the United States, and have their permanent place of residence in PMllipstown, New York, where they resided during the relevant taxable years. Their gift tax returns for those years were filed with the then collector of internal revenue for the third district of New York.

Petitioner George W. Perkins as settlor created by written instruments separate irrevocable trusts for the benefit of seven grandchildren, as follows:

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The trust agreements were identical, except with respect to the names of the beneficiaries and trustees. In each trust, the City Bank Farmers Trust Company, petitioner George W. Perkins, and the parents of the individual beneficiary were named as trustees.

The gifts in question consisted of shares of corporate stock and were made to the trusts by both petitioners during the 3 years 1951, 1952, and 1953, as follows:

Donob — Geobge W. Perkins

Tamable year 1951

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Taxable year 1952

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Taxable year 1958

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Donor — Linn M. Perkins

Tamable year 1951

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Tamable year 1952

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Tamable year 1958

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When petitioners first considered making such gifts they sought the advice of an attorney, and in February 1951 petitioner George W. Perkins received the first draft of the proposed trust agreement. He inquired as to the availability of annual exclusions, and advice was sought of tax counsel. The latter’s suggestions were approved, and the trust deeds were prepared and executed.

Petitioners’ chief objectives in setting up the trusts were to provide for adequate education of the grandchildren, to secure for them assurance of available funds for adequate support, maintenance, and medical care, and to make a fund available for each grandchild eventually to dispose of as he or she should see fit.

Each trust was to continue until the respective beneficiary should reach the age of 25. Income, and, if necessary, principal, was to be applied in the discretion of the trustees to the education, maintenance, and support of such beneficiary. The trustees were to accumulate any income not so expended and pay such net income or the assets in which it is invested to the beneficiary upon his or her attainment of 21 years of age. Thereafter the trustees are to distribute net income currently to the beneficiary until 25 years of age, at which time the trust is to terminate and the principal is to be paid over. However, each beneficiary, or his parent or duly appointed guardian, was given the right at any time to demand and receive as property of the beneficiary all or part of the principal and accumulated income. Various provisions governed the distribution of any remaining principal and income should a beneficiary predecease the trust.

No income or corpus of any of the trusts has been distributed. No exercise of any of the foregoing powers to withdraw principal or income has taken place, and all of the trusts were still in existence at the time of trial. When the trusts were created and at the time each of the foregoing gifts was made all of the beneficiaries were young and insufficiently mature to make an intelligent, effective demand for the termination of the respective trusts, or for the distribution of all or a part of income or corpus.

The parents of each beneficiary were and are fully able to provide adequately for his or her support, maintenance, education, and medical care. Petitioners were aware of this, expected such state of affairs to continue, and did not anticipate, absent unforeseen emergency, that any parent or guardian would demand principal or income. Petitioners, however, recognized the possibility that future needs or misfortunes might arise, which would require or make desirable the existence of such power. No guardians have been appointed except with respect to an appointment of the mother of one of the beneficiaries. That appointment took place on December 17, 1952. At all times material the parents of the beneficiaries were adults.

On each of the gift tax returns in question petitioners claimed annual exclusions of up to $3,000 for each beneficiary. Respondent has disallowed such exclusions on the ground that the gifts were of future interests. The deficiencies determined by him have resulted solely from that disallowance.

The issue as to whether a gift is of a present or future interest is not one of the time of vesting, but rather whether there is any substantial barrier to the present use, possession, or enjoyment by the donee. Commissioner v. Disston, 325 U. S. 442; Fondren v. Commissioner, 324 U. S. 18; Ryerson v. United States, 312 U. S. 405; United States v. Pelzer, 312 U. S. 399; Commissioner v. Sharp, 153 F. 2d 163 (C. A. 9). There is infinite variety in the possible terminology of trust instruments and the circumstances surrounding their creation, and each case must be decided in the light of its own trust instrument and surrounding circumstances. Commissioner v. Kempner, 126 F. 2d 853 (C. A. 5).

The trust instruments by themselves appear to have given a present interest to the beneficiaries. Each provides that notwithstanding all other provisions the beneficiary, his duly appointed guardian, or his parent may at any time demand and receive all of the income and principal. To be sure, the beneficiaries were minors and unable effectively to exerecise that right, and only with respect to two gifts in 1953 to one of the seven beneficiaries was there a duly appointed guardian at the time of the making thereof. Had the power to demand income or principal been limited to the beneficiaries or their duly appointed guardians, respondent’s position, at least as to all gifts other than the two aforementioned, might well be tenable; there would have been at the time such gifts were made no person who could make an effective demand for immediate use, possession, and enjoyment by the beneficiaries. Stifel v. Commissioner, 197 F. 2d 107 (C. A. 2), affirming 17 T. C. 647. But cf. United States v. Baker, 236 F. 2d 317 (C. A. 4); Gilmore v. Commissioner, 213 F. 2d 520 (C. A. 6), reversing 20 T. C. 579; Kieckhefer v. Commissioner, 189 F. 2d 118 (C. A. 7), reversing 15 T. C. 111.

In the instant proceeding, however, this right was also given to the adult parents of the beneficiaries, none of whom appears to have been incompetent to exercise the power thus bestowed. Therefore, with respect to each of the gifts in question there was at all times someone who could have made an effective, binding demand for principal and income. By the terms of the trusts alone, there was no substantial bar to present use, possession, and enjoyment by the donees.

Petitioners expected the trusts to continue for a substantial period and did not anticipate actual exercise by any of the parents of that power. But we do not agree with respondent that such expectation is more than precatory, or that it vitiates the clear right unmistakably given. [Respondent may not pick and choose from among the provisions of the trust. He may not preserve those parts of the trust language he deems helpful to his position and ignore, by his ipse dixit that they are “vitiated,” those parts of such instruments which are fatal to his contentions. The parents of the beneficiaries were given the power by clear and unambiguous language to demand and receive on behalf of their respective children all or part of the principal and accumulated income. We cannot see how this power is “vitiated” by the opinion of the settlors that it would be unwise to exercise it under existing conditions or their expectation, however it may be justified by subsequent events, that there would in fact be no such exercise. Eespondent has cited no authority, and we know of none, that a demand by the parents could have been properly resisted. The trusts in literal terms created present interests.

We agree with respondent that the circumstances surrounding the creation of the trusts and the making of the gifts are relevent factors, to be considered along with the trust instruments themselves. However, we cannot find from such facts that the gifts were not indeed of present interests. It is admitted that petitioners expected that the power given to the parents of the beneficiaries, would not be exercised, at least in the absence of a substantial change of circumstances, and this expectation has apparently proved justified. The parents were and have continued to be financially able to support their children without recourse to trust income or principal. Nonetheless, they have continuously had the right to make such demand since the time the gifts were made. The existence or nonéxistence of that right at the relevant time must determine the nature of the gifts, not the subsequent conduct of the parents in choosing whether or not to exercise it. Whatever the motives of the petitioners, their hopes or expectations, we cannot hold that the parents of the beneficiaries did not indeed have the right to make such demand at any time. They are clearly given such right by the terms of the trust instruments. The surrounding circumstances show only that it was unlikely that they would choose to exercise it, but do not negate its existence.

Respondent also claims that petitioners had such control over their children (the parents of the beneficiaries) that they could effectively prevent them from exercising the right so conferred upon them by the trust instruments. Nothing in the record before us supports this contention.

Finally, respondent points to the fact that the trust instruments were drafted with the gift tax exclusions in mind, and cites Gregory v. Helvering, 293 U. S. 465. In the Gregory case the formal appearance of the transactions was misleading and the legal consequences normally flowing therefrom were not in fact intended. In the instant proceeding, regardless of the petitioners’ motives, or why they did what they in fact did, the legal rights in question were created by the trust instruments and could at any time thereafter be exercised. Petitioners having done what they purported to do, their tax-saving motive is irrelevant.

In the instant proceeding petitioners decided to and did create trusts for the benefit of their minor grandchildren, and thereafter made gifts of property to those trusts. Neither the trusts nor any of the gifts were unreal or illusory. Petitioners in every relevant transaction did what they purported to do. In so doing, they chose the path of least tax cost. There is nothing improper in so doing, and their actions are no less valid and real than had they chosen instead the path leading to greater tax liability. Their tax liability must be based on what they in fact did, not upon what they might have done. The gifts were of present interests, and respondent erred in determining otherwise.

Reviewed by the Court.

Decisions will be entered for the petitioners.