Opinion
Docket No. 25757.
1951-05-4
WILLIS D. WOOD, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
John J. Boyle, Esq., for the petitioner. Robert M. Willan, Esq., for the respondent.
John J. Boyle, Esq., for the petitioner. Robert M. Willan, Esq., for the respondent.
Gift Tax: Income of trust held to represent gift of future interest.
Under the terms of a trust created by the petitioner for the benefit of a minor grandchild which is to terminate when beneficiary becomes 21 years old, or upon his death, and under which the gift of corpus is a gift of a future interest, the only direction to the trustee regarding distribution of income is to pay the beneficiary so much of the income as may be requested by the child's father, or some other person, provided total payments in a year do not exceed net income for such year. The trustee shall accumulate undistributed income until the trust ends. Held, that the gift of trust income is a gift of a future interest under section 1003(b)(3), Internal Revenue Code. Fondren v. Commissioner, 324 U.S. 18; Commissioner v. Disston, 325 U.S. 442. Commissioner v. Sharp, 153 F.2d 163, distinguished.
The Commissioner has determined deficiencies in gift tax for 1944 and 1945 in the respective amounts of $315.65 and $203.87.
This proceeding has been submitted under the pleadings. There is no dispute about the facts. The question to be decided is whether the petitioner made a gift of a present interest in the income of a trust in each year so as to be entitled to the statutory exclusion allowed by section 1003(b)(3) of the Code. The respondent has denied the exclusion claimed under the petitioner's computation of the amount of net gifts in each year. The petitioner admits that a part of each gift to the trust was a gift of a future interest in property, to which the statutory exclusion may not be applied, and he did not claim the exclusion in the gift tax returns with respect to part of each gift.
The returns were filed with the collector for the second district of New York.
FINDINGS OF FACT.
On November 30, 1944, the petitioner, who is a resident of New York City, executed a trust agreement with the Title Guarantee and Trust Company, as trustee. The beneficiary of the trust is Willis A. Wood, petitioner's grandson, who was less than one year old on the dates of the two gifts to the trust which are involved in this proceeding. The trust will terminate at the time Willis A. Wood attains the age of 21 years, or upon his death if he dies before he becomes 21 years old. Upon the termination of the trust, the trust corpus together with any and all accumulations of income shall be paid to Willis A. Wood, if he is alive. If he dies before he shall have attained the age of 21 years, the corpus and accumulations shall be distributed to his descendants, per stirpes, or, if none, to his father, Robert M. Wood, the petitioner's son.
The petitioner paid cash to the trustee on November 30, 1944, and January 3, 1945, in the sums of $3,000 and $2,000, respectively. These cash payments were the only gifts to the trust and constituted the sole property or fund of the trust.
The trust agreement provided as follows:
ARTICLE FIRST: A. (The Trustee is) To hold, manage, invest and reinvest the trust estate and to collect the rent, interest, income and dividends (hereinafter referred to as income), therefrom, and to pay to Willis Alexander Wood, grandson of the Donor, so much of the net income thereof as may be requested in writing by Robert M. Wood, father of said Willis Alexander Wood, or, after the death of said Robert M. Wood, by the mother, guardian or other person having the care and control of said Willis Alexander Wood, but the total of such payments in any one year shall not exceed the net income of the trust fund for such year, and to accumulate the balance of said income until the said Willis Alexander Wood shall have attained the age of twenty-one years and thereupon to assign, transfer and pay over, and the Donor does hereby give, convey and assign the principal of said trust fund, together with all accumulated income, to said Willis Alexander Wood.
In determining the deficiencies in gift tax, the respondent included in taxable net gifts $3,000 in 1944 and $2,000 in 1945, denying exclusion from the amount of net gifts of the petitioner's valuation of the alleged present interest in trust income, and holding that the value of each gift was the entire amount thereof at the date of each gift. The respondent's reason for his determination, as stated in the statement accompanying the notice of deficiency, was as follows:
The present worth of the income from the * * * gift is a gift of a future interest * * * , and since the statutory exclusion is applicable only to gifts of present interests, the allowance of the exclusion against gifts * * * is denied.
OPINION.
HARRON, Judge:
A gift of property may comprise a gift of a present interest and a gift of a future interest. Fisher v. Commissioner (C.A. 9, 1942), 132 F.2d 283; and Sensenbrenner v. Commissioner (C.A. 7, 1943), 134 F.2d 883. The petitioner admits that the gifts to the trust were gifts of future interests with respect to the principal and income accumulations under the rules of Helvering v. Hutchings, 312 U.S. 393 (1940), and United States v. Pelzer, 312 U.S. 399 (1940). The petitioner contends that a gift of a present interest was made with respect to the trust income, which the respondent denies. The petitioner relies upon Commissioner v. Sharp (C.A. 9, 1946), 153 F.2d 163, and Smith v. Commissioner (C.A. 8, 1942), 131 F.2d 254.
The respondent relies upon Vivian B. Allen, 3 T.C. 1224 (1944), and upon the rationale of Commissioner v. Disston, 325 U.S. 442 (1945).
The petitioner relies upon other cases which can no longer be followed because they were decided upon the authority of Commissioner v. Wells (C.A. 7, 1937), 88 F.2d 339, which was, in effect, overruled by Helvering v. Hutchings, 312 U.S. 393, and United States v. Pelzer, 312 U.S. 399. See Commissioner v. Gardner (C.A. 7, 1942), 127 F.2d 929.
The meaning of the clause ‘future interests in property‘ in section 1003(b)(3) of the Code, and in corresponding sections of the earlier revenue acts, and in the applicable regulations of the Commissioner, and the principles to be applied in making the distinction between a gift of a present interest and a gift of a future interest have been clarified by the Supreme Court in Ryerson v. United States, 312 U.S. 405 (1941); United States v. Pelzer, supra; Fondren v. Commissioner 324 U.S. 18 (1945); and Commissioner v. Disston, supra. See John W. Kieckhefer, 15 T.C. 111. In order to obtain the exclusion from taxable net gifts under section 1003(b)(3), the taxpayer must show that the donee of the gift received ‘the right presently to use, possess or enjoy‘ the property or an interest therein. United States v. Pelzer, supra, p. 403. It must be proved by the taxpayer, Commissioner v. Disston, supra, that property or interest in property which is given is not a future interest within the meaning of the statute and of the regulation which interprets the statute and defines the clause ‘future interests in property,‘ which interpretation of the statute has received Congressional approval. Fondren v. Commissioner, supra. The meaning of the term ‘future interests,‘ as used in the statute, is an interest in property ‘whether vested or contingent, * * * which are(is) limited to commence in use, possession, or enjoyment at some future time * * * .‘ Section 86.11, Regulations 108.
The issue in this proceeding upon its particular facts, turns on whether the interest in trust income which was acquired by the beneficiary of the trust was limited or restricted in his enjoyment, use, or possession thereof at the date of the gift, so that his possession and use were to be in the future. Neither party devotes argument to the point that the beneficiary was a minor at the date of the gift, nor to the motives of the petitioner-donor, so that we are not obliged to consider such aspects of the problem; but since it is a fact that the trust beneficiary was an infant at the dates of the gifts, it should be noted that this factor is relevant, chiefly, to the extent that it has bearing upon the element of the time for use and enjoyment of the trust income, or for the deferment thereof. It was stated in Fondren v. Commissioner, supra, that ‘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.‘
Under the trust agreement the trustee, a corporation, is directed to pay to Willis Alexander Wood so much of the net income of the trust in a year ‘as may be requested in writing by Robert M. Wood, the father of said Willis Alexander Wood‘ during the life of Robert M. Wood, and after his death, so much of the net income as may be requested in writing by the mother, guardian, or other person having the care and control of Willis Wood. The total payments to Willis Wood in one year shall not exceed the net income of the trust fund for such year. If the payments which are made to the beneficiary in a year are less than the total net income of the trust for such year, the trustee shall accumulate such balance as it retains until the beneficiary becomes 21 years old. Under the trust agreement the donor makes a gift of all accumulated income to Willis Wood, the beneficiary.
The trustee is not given any discretion in the matter of making payments of trust income to the beneficiary. Rather, he is empowered to make distributions of income only upon the request, or demand, of a designated person, and unless he receives such request, he is not obligated to make any distribution of income to the beneficiary. Likewise, the beneficiary has no right to receive any of the trust income except after the person designated in the trust agreement has made a written request to the trustee to pay income to the beneficiary. There is, therefore, a restriction upon the trustee's power to make payments of trust income to the beneficiary, and the beneficiary's right to receive payment of income is contingent upon the making of the written request by the person designated to do so. It is implicit in the trust provision that the person designated to make demand upon the trustee for payment of income to the beneficiary is given the absolute discretion to decide whether any payment of trust income shall be made by the trustee, in any year, and the discretion is entirely unlimited, unguided, and unrestricted. It also seems to be clear, under the trust provision, that if the designated person makes no request for the payment of income to the beneficiary in a year, the trustee shall accumulate the net income of the trust for such year. However, if this latter construction of the trust provision is doubtful, this matter does not alter the conclusion which is made under the issue presented. There can be no doubt that the trustee is directed to accumulate undistributed income and that he has a right to withhold distribution if no request is made for distribution.
It is concluded that the interest of the beneficiary in the trust income was restricted and limited by the discretion which the donor gave to the person designated to make the requests to the trustee for the payment of income. Since the person so designated has an absolute and unlimited discretion, the contingency that he will exercise his discretion in favor of the accumulation of income by the trustee is as great as and is equal to the contingency that he will exercise his discretion in favor of the distribution of income to the beneficiary. Furthermore, there is the contingency that he will exercise his discretion at various times in different ways so as to allow varying amounts of income in different years to accumulate, or conversely, to request the payment of income to the beneficiary in varying amounts, depending upon the judgment of the designated person. These contingencies constitute a barrier to the beneficiary's certain and present use, possession, and enjoyment of all or any definite part of the trust income from year to year and compel the conclusion that at the dates of the gifts in question, the beneficiary, Willis Alexander Wood, did not receive an absolute right to the immediate enjoyment of trust income; that he did not receive the gift of an interest in the trust income which was to commence in use, possession, or enjoyment at the date of the gift; and that he received a gift of an interest in the income which was to commence only at such time as the designated person made written demand on the trustee to distribute income. Since the beneficiary's right was dependent upon the act of another whose act was not required to be exercised in his favor ‘currently,‘ the beneficiary's interest in trust income was a ‘future interest‘ at the date of the gift within the meaning of that term in the statute. It is so held.
It has been held that where a donee's enjoyment and use of a gift are subject to the exercise of the discretion of a trustee, the donee's interest is a future interest, and the statutory exclusion has been denied. Welch v. Paine (C.A. l, 1942), 130 F.2d 990; Commissioner v. Brandegee (C.A. 1, 1941), 123 F.2d 58. The same reasoning must be applied where the discretion is placed in someone other than the trustee.
It is noted, also, that in determining whether a fiduciary is entitled to take deductions under section 162 of the Code, for purposes of the income tax, and in determining whether a beneficiary is taxable on income, the effectuation of the statutory scheme under section 162 requires determining whether a fiduciary is under an absolute obligation by direction of a trust to pay income to a beneficiary, whether he has done so or not, and whether the beneficiary is entitled to receive income as a matter of right. Plimpton v. Commissioner (C.A. 1, 1943), 135 F.2d 482, 486; Commissioner v. Stearns (C.A. 2, 1933), 65 F.2d 371. It has been held, for purposes of section 162, that where it is in the discretion of the trustee either to accumulate or distribute income, the income is taxable to the trust, if there has been no distribution. Plimpton v. Commissioner, supra.
It is provided in section 1005 of the Code that the value of a gift at the date of the gift shall be considered the amount of the gift. Where the right of the donee to receive possession of property, or the enjoyment and use of an interest therein, is dependent upon a contingency which carries with it uncertainty as to the value of that which the donee receives, the value of the gift to the donee is not ascertainable. If there can be doubt as to the correctness of our above holding, then we are confronted with the same problem which existed in Commissioner v. Disston, supra, because here, as in that case, the trust provision lacks indicia that there will be ‘a steady flow of some ascertainable portion of income‘ to the beneficiary under the requirements of the trust. In this situation, the value of a gift of an interest in trust income cannot be ascertained through the application of any actuarial methods. When a taxpayer is unable to ascertain the value or amount of a gift for which he seeks exclusion or deduction from the amount of taxable gifts, the exclusion or deduction must be denied, and the result is of the taxpayer's making. Robinette v. Helvering, 318 U.S. 184; Commissioner v. Disston, supra; Vivian B. Allen, supra; Welch v. Paine, supra.
This Court has previously considered the decision in the case of Smith v. Commissioner, supra. See Mary M. Hutchings, 1 T.C. 692, 697, affd., 141 F.2d 422. The Smith case is distinguishable on the facts from this proceeding for the same reasons as we discussed in the Hutchings case. The Sharp case, supra, on which petitioner relies, is likewise distinguishable. Upon review of the Sharp case, the Court of Appeals concluded that under that trust, the trustee ‘had no discretion to determine if he would or would not pay over the income‘ to the beneficiary, and that ‘the trustee had no right to withhold income of the trust estate.‘
The respondent's determinations are sustained.
Decision will be entered for the respondent.