Gardner v. Commissioner

J. WILLIS GARDNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Gardner v. Commissioner

Docket No. 92115.

United States Board of Tax Appeals

41 B.T.A. 679; 1940 BTA LEXIS 1152;

March 29, 1940, Promulgated

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1. Petitioner transferred to a trust securities for the equal benefit of certain of his grandchildren. The trustee had discretion to pay such amounts as it deemed necessary for the education, support, and maintenance of each of the grandchildren until they respectively reached the age of 25 years, after which the share of each in the entire income was to be paid to him. When each reached the age of 35 years, one-half of his share of the trust corpus was to be paid to him and the other one-half was to be retained in the trust and the income was to be paid for life to him, with remainder to his descendants. Held, the gifts of the securities were to the beneficiaries of the trust and not to the trust itself, and were gifts of present interests in property rather than of future interests, and petitioner is entitled to one $5,000 exclusion for each gift to a grandchild, under section 504(b) of the Revenue Act of 1932.

2. Petitioner transferred property to a trust with directions that the income therefrom should be paid to the named beneficiary for a period of 25 years or for life, whichever was the shorter. If at the end of 25 years the beneficiary was still living, the trust was to terminate and the trust corpus was to be given to the beneficiary. The Commissioner determined that the exclusion allowed with respect to the property placed in trust for this beneficiary is limited to the present value of the right to receive the income therefrom for 25 years. Held, the Commissioner is sustained because the gift of the remainder interest at the end of 25 years to the beneficiary if he then be living is "a future interest" under section 504(b) of the Revenue Act of 1932.

Robert Ash, Esq., for the petitioner.

A. B. Peterson, Esq., for the respondent.

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BLACK

FINDINGS OF FACT.

The Commissioner determined deficiencies in gift taxes against petitioner as follows:

1933	$1,701.25
1935	101.82
1936	4,876.76
Total	6,679.83

The 1933 deficiency results in part from the increase in net gifts for preceding years and in part from the disallowance by the Commissioner of $48,125 exclusions claimed by petitioner on his gift tax return. With respect to the disallowance of the $48,125 exclusions claimed by petitioner, the Commissioner stated in his deficiency notice as follows:

No exclusions are allowed with respect to the property placed in trust for the benefit of your grandchildren. As the indenture of trust provides that the trustee shall apply such portions of the net income of the respective shares of the grantor's grandchildren as the trustee may deem necessary and proper for their education, maintenance and support until they respectively become twenty-five years of age, the beneficiaries do not have the immediate right to the unrestricted use, possession or enjoyment of the income and/or principal of the trust estate. The gifts therefore, are considered to be gifts of future interests against which no exclusions are allowable.

The deficiency for 1935 results in part from the increase by the Commissioner in net gifts for preceding years and in part from the decrease by the Commissioner of the $4,620 exclusion claimed by petitioner to $3,230.65. This latter action is explained by the Commissioner in his deficiency notice as follows:

The exclusions allowed with respect to the property placed in trust for the benefit of Gifford V. Leece, is limited to the present value of the right to receive the income therefrom for twenty-five years. The gift of the remainder, which is to take effect at the end of twenty-five years or on the death of Gifford V. Leece, is considered to be a gift of a future interest against which no exclusion is allowable. * * *

The deficiency for 1936 results in part from the increase in net gifts for preceding years and in part from the reduction by the Commissioner of the exclusions claimed by petitioner in his gift tax return for 1936 from $40,000 to $2,781.05. This latter adjustment is explained by the Commissioner in his deficiency notice as follows:

The exclusions claimed with respect to the property placed in trust for the benefit of your grandchildren are disallowed for the reason set forth above in connection with your 1933 return.

An exclusion limited, as explained above in connection with your 1935 return, is allowed with respect to the property placed in trust for the benefit of Gifford V. Leece. * * *

The petition assigns errors as follows:

(a) The Commissioner erred in holding that gifts made in 1933 of property, placed in trust for the benefit of petitioner's grandchildren, were gifts of future interests and that no exclusions from gift tax are allowable.

(b) The Commissioner erred in holding that the gift made in 1935 to a trust for the benefit of Gifford V. Leece was partly a gift of a future interest and that an exclusion from gift tax in the amount of $3,230.65, instead of $5,000.00, is allowable.

(c) The Commissioner erred in holding that a portion of the gift made in 1936 by petitioner and his wife to a trust for the benefit of Gifford V. Leece was, in part, a gift of a future interest and, accordingly, that only a part of the exclusion should be allowed in computing gift tax.

(d) The Commissioner erred in holding that gifts made in 1936 to trusts for the benefit of petitioner's grandchildren were gifts of future interests and that no exclusions from gift tax are allowable.

Facts were stipulated as follows:

I

May 4, 1926, the petitioner executed an instrument entitled "Indenture of Trust", by which the St. Louis Union Trust Company of St. Louis, Missouri, was made trustee to hold certain shares of stock in the Gardner Governor Company for the benefit of petitioner's ten grandchildren. A copy of the said instrument is attached hereto, marked Exhibit "A" and made a part of this stipulation by reference.

II

November 8, 1933, petitioner, under the terms of the instrument referred to in the preceding paragraph, deposited with the trustee, to be held for the benefit of his ten grandchildren, 2500 shares of Gardner-Denver Company Common stock which had a then value of $19.25 per share, or a total value of $48,125.00.

III

No gift tax return was filed by petitioner, on or before March 15, 1934, with reference to the gifts referred to in the preceding paragraph, because petitioner took the position he was entitled to an exclusion from tax in the amount of $5,000.00 for each of the ten grandchildren.

On October 10, 1936, the petitioner, at the direction of the Collector of Internal Revenue for the Eighth District of Illinois, filed a non-taxable gift tax return for 1933, claiming the said exclusions.

In determining the deficiency for 1933, respondent refused to allow any exclusion in respect thereof.

IV

July 12, 1935, the petitioner, together with his wife, Helen G. Gardner, executed an instrument by which the St. Louis Union Trust Company and Ralph G. Gardner were made trustees to hold certain shares of stock in the Gardner-Denver Company for the benefit of Gifford V. Leece, nephew of Helen G. Gardner. A copy of the said instrument is attached hereto, marked exhibit "B" and made a part of this stipulation by reference.

At the time the said instrument was executed the petitioner transferred to the trustees, 220 shares of common stock in the Gardner-Denver Company which had a then value of $23.50 per share, or a total value of $5,170.00.

V

No gift tax return was filed by petitioner on or before March 15, 1936, with reference to the gift mentioned in the preceding paragraph because petitioner took the position he was entitled to an exclusion from tax in the amount of $5,000.00 and when the gift was made he believed the stock had a total value of $4,620.00.

On October 10, 1936, the petitioner, at the direction of the Collector of Internal Revenue for the Eighth District of Illinois, filed a non-taxable gift tax return for 1935, claiming a $4,620.00 exclusion.

In determining the deficiency for 1935, respondent allowed an exclusion of $3,230.65, computed as set forth in the deficiency notice.

VI

August 12, 1936, petitioner made a gift to the trust created for the benefit of Gifford V. Leece referred to in paragraph IV above of 80 shares of common stock in the Gardner-Denver Company, which had a then value of $4,560.00.

VII

In the gift tax return for 1936 filed by petitioner March 17, 1937, an exclusion of $4,560.00 was claimed with reference to the gift referred to in the preceding paragraph.

In connection therewith respondent allowed an exclusion in the amount of $2,781.05, computed as set forth in the deficiency notice.

VIII

September 8, 1936, petitioner deposited with the trustee under the indenture of trust referred to in paragraph I hereof, 800 shares of common stock of the Gardner-Denver Company, which had then a value of $40,800.00. A copy of the letter to the trustee with reference to the said gift is attached hereto, marked Exhibit "C" and made a part of this stipulation by reference.

IX

In his gift tax return for 1936, petitioner reported the 800 shares of stock mentioned in paragraph VIII at a value of $40,800.00 and claimed exclusions in respect thereof in the amount of $40,000.00. In determining the deficiency for 1936, respondent refused to allow any exclusion on account thereof.

The trust instrument referred to as Exhibit A in the foregoing stipulation contains the following provisions which seem pertinent to the issues we have here to decide:

* * *

After paying the necessary expenses incurred in the management and investment of the trust estate, including the compensation of the trustee for its own services, the trustee shall use and apply such portions of the net income of the respective shares of the grantor's said grandchildren in and to the trust estate as the trustee may deem necessary and proper for their education, maintenance and support, until they respectively become twenty-five (25) years of age, and as each grandchild reaches the age of twenty-five (25) years, the trustee shall pay over to him or her the portion of the net income from his or her share not theretofore expended for the purposes aforesaid, and shall thereafter pay to such grandchild direct the net income derived from his or her share, until the termination of the trust respecting the same as is hereinafter set out. During the minority of any of the grantor's said grandchildren, the trustee may pay over the share of such minor in and to the net income, or any part thereof, to the parents of such minor, to be used by them for the purposes aforesaid, and the trustee is requested to consult from time to time with the parents of any minor grandchild respecting the disposition of his or her share of the net income from the trust estate.

THIRD: As and when each of the grantor's said grandchildren reaches the age of thirty-five (35) years, the trustee shall pay over and deliver to him or her a one-half (1/2) part of the property then constituting his or her equal share of the trust estate, free from trust, and shall continue to hold the remaining one-half (1/2) part of the share of such grandchild in trust with the same powers and duties respecting the management and investment thereof as are hereinbefore set out, thereafter paying to such grandchild the balance of the net income derived from the remaining portion of his or her share of the trust estate, so long as he or she shall live.

FOURTH: Upon the death of any of the grantor's said grandchildren, the trust respecting his or her equal share of the trust estate shall at once cease, and the trustee shall pay over and deliver the residue of the property then constituting such share, both principal and undistributed income, free from trust, to the descendants than living of such deceased grandchild, they taking per stirpes, or if no such descendant is then living, the share of such deceased grandchild shall go, in equal parts, to his or her brothers and sisters, who are grandchildren of the grantor, or to their respective descendants then living, per stirpes, if any of them is dead; but if any of the grantor's said grandchildren should die leaving no descendant of him or her living at the time of the termination of the trust, and no brothers or sisters who are grandchildren of the grantor, nor any descendant of such brother or sister living, then the share of such deceased grandchild shall go, in equal parts, to the others of the grantor's grandchildren herein named, or to their respective descendants then living, per stirpes, if any of them is dead; provided, however, that if any part of the share of such deceased grandchild in and to the trust estate, as aforesaid, shall go to another of the grantor's grandchildren, who is a beneficiary of the trust herein created, then the same shall be held by the trustee upon the same trusts and subject to the same terms and conditions, and shall be managed and distributed, both as to income and principal, in all respects as is herein set out respecting the original share of such other grandchild in and to the trust estate.

In the event, however, any of the grantor's said grandchildren should die without leaving any descendant of him or her living, and no brother or sister who is a grandchild of the grantor herein, nor any descendant of such brother or sister is then living, and no other grandchild of the grantor herein named, nor any descendant of such other grandchild, is then living, then the share of such deceased grandchild in and to the trust estate, as aforesaid, shall be paid over and delivered by the trustee, free from trust, to said J. Willis Gardner, or if he is not then living, to the persons who may then be the heirs-at-law of the grantor, as determined by the laws of the State of Missouri in force at that time.

The trust instrument referred to as Exhibit B in the foregoing stipulation contains the following provisions which seem pertinent to one of the issues we have here to decide:

Paragraph (A) The Trustees shall hold said personal property and the investments and the reinvestments thereof in trust for the use and benefit of Gifford V. Leece, of Pasadena, California, nephew of said Helen Gardner, for and during the period of his lifetime; provided, however, if said Gifford V. Leece shall be living twenty-five years from and after the date hereof, then twenty-five years from and after the date hereof all of the property then held by the Trustees hereunder. Together with all undistributed net income therefrom, shall be transferred and conveyed, free of trust, to said Gifford V. Leece. So long as the trust herein created for the benefit of said Gifford V. Leece shall continue, the Trustees shall pay to him in quarterly or other convenient installments, each year, all of the net income from and of the trust estate.

Paragraph (B) If upon the death of said Gifford V. Leece during the operation of the trust herein created for his benefit no child or children or grandchild or grandchildren of his be living, then upon the death of said Gifford V. Leece, the Trustees shall transfer and convey, free of trust, per stirpes, all the property then held by the Trustees hereunder, together with all undistributed net income therefrom to the persons who under the laws of descent and distribution in force in the State of Missouri, at the time of his death would be his heirs at law.

Paragraph (C) If upon the death of said Gifford V. Leece during the operation of the trust herein created for his benefit any child or grandchild of his be living then upon the death of said Gifford V. Leece, the Trustees shall divide the trust estate into such number of equal shares as may be necessary to provide one such share for each of his children then living, and one such share for the living child of living children collectively of each child of said Gifford V. Leece who may then be deceased.

In addition to the facts which were stipulated, petitioner offered the deposition of one witness - himself. His testimony was directed entirely to the contention that the trust instrument dated May 4, 1926, created ten trusts instead of one trust.

OPINION.

BLACK: Inasmuch as the Board has recently held that the trust is not the donee of gifts, but that the beneficiaries of the trust are the donees, see , we have omitted any findings of fact as to whether the trust indenture dated May 4, 1926, created one trust or ten trusts. A finding of fact as to this matter is immaterial and therefore, unnecessary. Much of the discussion in petitioner's brief and in respondent's brief is devoted to this question, but in view of our decision in the Rubinstein case, it is unnecessary to discuss it further.

Petitioner's assignments of error (a) and (d) involve the same issue and will be treated together. Assignment of error (a) involves transfers made to a trust for the benefit of ten of petitioner's grandchildren in 1933 and assignment of error (d) involves transfers made to the same trust in 1936 for the benefit of eight of petitioner's grandchildren.

For the respective taxable years petitioner claimed an exclusion of $5,000 for each grandchild to whom a gift was made, under section 504(b) of the Revenue Act of 1932. Respondent disallowed any exclusions on the ground that under the terms of the trust indenture petitioner's grandchildren did not have the immediate right to the unrestricted use, possession, or enjoyment of the income and/or principal of the trust estate. Under such circumstances, the Commissioner said in his deficiency notice: "The gifts therefore, are considered to be gifts of future interests against which no exclusions are allowable."

The case of , involved facts which it seems to us are not distinguishable from those in the instant case. In that case we held that, although the donees did not have the immediate right to the unrestricted use, possession, or enjoyment of the property, the gifts were nevertheless gifts of a present interest in property rather than of future interests and that the taxpayer should be sustained in his contention.

To the same effect, on facts which though not identical with the facts we have here are somewhat similar, is our decision in ; affd., ; and , as to fund "C" and fund "D" involved in that proceeding. On the strength of these authorities, we decide issues (a) and (b) in favor of petitioner.

We next consider assignments of error (b) and (c). These assignments involve the issue of whether or not transfers to a trust for the benefit of Gifford V. Leece were in part gifts of future interests in property. We think the action of the Commissioner in determining that the exclusions allowed with respect to the property placed in trust for the benefit of this individual are limited to the present value of his right to receive income therefrom for 25 years must be sustained. Under the terms of the trust, the income from the property was to be paid to Leece either for life or the term of 25 years, whichever was the shorter. Then if he were living at the end of 25 years the remainder interest in the property held by the trustees, together with all undistributed net income therefrom, should be transferred and conveyed, free of trust, to said Gifford V. Leece. Thus it seems a completed gift of the remainder interest in the trust corpus was to be made to Gifford V. Leece only in case he was living 25 years from the date of the trust. This we hold to be a gift of a "future interest" in property under section 504(b) of the Revenue Act of 1932. On this point we think the Commissioner must be sustained, under authority of .

Decision will be entered under Rule 50.