Opinion
Docket No. 27501.
1951-08-6
FRANCES MCGUIRE RASSAS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Samuel T. Lawton, Esq., for the petitioner. David F. Long, Esq., for the respondent.
Petitioner on December 29, 1947, made a gift in trust to her infant daughter who at that time was 19 days old. The trustees were petitioner and her husband. The trust contained the following provision: ‘The Trustees shall pay the income of the Trust Estate unto DENICE RASSAS in quarterly installments. Payment of such income to said minor shall be made by the Trustees paying and applying, in their sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said DENICE RASSAS during her minority, and any income not so paid and applied shall be accumulated by the Trustees during the minority of the said DENICE RASSAS, as and for her own separate property, and shall be paid to her upon her coming of age.‘ During the year 1947 and subsequent years, the petitioner and her husband were financially able to maintain, educate, and support Denice and none of the income of the trust was at any time used for her maintenance, education, and support since the creation of the trust. Held, that the gift was one of future interests in property and no exclusion is allowable to petitioner under section 1003(b)(3) of the Internal Revenue Code. Fondren v. Commissioner, 324 U.S. 18. Samuel T. Lawton, Esq., for the petitioner. David F. Long, Esq., for the respondent.
The Commissioner has determined a deficiency in petitioner's gift tax of $118.88 for the year 1947. This deficiency results from the Commissioner's disallowance of an exclusion of $2,750 claimed by petitioner on her gift tax return for the year 1947. The Commissioner explains this adjustment in his deficiency notice as follows:
It is held that under the trust created December 29, 1947, the beneficiary did not receive an immediate, unrestricted right to the use, possession or enjoyment of all the income of the trust. Therefore, the gift to the trust is considered a future interest in property against which no exclusion is allowable. * * *
The petitioner contests this action of the Commissioner by an appropriate assignment of error.
FINDINGS OF FACT.
The facts have been stipulated and we adopt the stipulation as our findings of fact. These facts may be summarized as follows:
Frances McGuire Rassas is a resident of Winnetka, Illinois. She is married to George J. Rassas. Frances McGuire Rassas and George J. Rassas are the parents of a child, Denice Rassas, who was born on December 10, 1947.
The petitioner and her husband filed separate income tax returns for the year 1947, showing an aggregate net income of $49,682.16. Petitioner filed her gift tax return for the period here involved with the collector for the first district of Illinois.
On December 29, 1947, the petitioner and her husband created a trust in which they named their daughter, Denice Rassas, as beneficiary and themselves as trustees. The assets conveyed by petitioner and her husband to themselves, as trustees, included 50 shares of the capital stock of Peoples Gas Light & Coke Co., an Illinois corporation, of the value of $4,400, which stock was contributed to the trust a voting trust certificate for 100 shares of the capital stock of Independent Pneumatic Tool Company.
The provision of the declaration of trust which was executed by the petitioner and her husband which bears upon the issue here involved is paragraph 3 of the declaration of trust which reads as follows:
3. The Trustees shall pay the income of the Trust Estate unto DENICE RASSAS in quarterly instalments. Payment of such income to said minor shall be made by the Trustees paying and applying, in their sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said DENICE RASSAS during her minority, and any income not so paid and applied shall be accumulated by the Trustees during the minority of the said DENICE RASSAS, as and for her own separate property, and shall be paid to her upon her coming of age. After said DENICE RASSAS shall become of age, the Trustees shall pay unto her the entire income of the said Trust Estate until she shall reach the age of twenty-five (25) years. When the said DENICE RASSAS shall arrive at the age of twenty-five (25) years, the said Trustees shall deliver unto her the principal of the Trust Estate held for her under the terms hereof.
After the creation of the trust under date of December 29, 1947, the petitioner and her husband opened a bank account in the name of Denice Rassas ‘by Frances McGuire Rassas or by George J. Rassas‘ in the City National Bank and Trust Company of Chicago, in the savings department thereof, and deposited in this account the income from the trust and also made withdrawals therefrom, the withdrawals having been made in the name of Denice Rassas, a minor, by one of the parents. Out of the funds which were deposited in the name of the minor in the City National Bank and Trust Company in this account, petitioner and her husband withdrew therefrom the sum of $981.25 which was expended by them for the purchase of 25 shares of the capital stock of Atlantic Coast Line, and upon the acquisition of this stock it was placed in the names of George J. Rassas and Frances McGuire Rassas, as trustees under the trust agreement dated December 29, 1947, for Denice Rassas. On June 6, 1950, the petitioner and her husband withdrew from this account, in the name of the minor, the further sum of $554.75 which was expended for purchase of a mortgage bond of the Chicago and Northwestern Railway in the sum of $1,000, which bond was registered in the names of the petitioner and her husband, as trustees, for Denice Rassas. On June 28, 1950, petitioner and her husband withdrew from the account of the minor the sum of $700 which was expended by them for purchase of certain shares of capital stock of the Peoples Gas Light & Coke Co., which stock was likewise placed in the names of George J. Rassas and Frances McGuire Rassas, as trustees, for Denise Rassas. On March 7, 1951, the petitioner and her husband withdrew the respective sums of $14 and $74 for the purpose of paying the balance due of Federal income tax of the minor for the previous years.
During the year 1947 and subsequent thereto, the petitioner and her husband were financially able to maintain, educate, and support Denice Rassas, the beneficiary, and none of the income of the trust estate was at any time used for the maintenance, education, and support of the minor since the creation of the trust on December 29, 1947.
The trustees still hold the stock which was the original subject of the trust. The balance of the income after the expenditures above set forth remains on deposit in the City National Bank and Trust Company in the name of Denice Rassas, subject to withdrawals by Frances McGuire Rassas or by George J. Rassas on behalf of the minor.
No guardian was legally appointed for Denice Rassas with respect to the principal of the trust or the income therefrom. It was stipulated that the Tax Court may take judicial notice of Chapter 68, Paragraph 15 of the 1947 Illinois Revised Statutes which reads as follows:
The expenses of the family and of the education of the children shall be chargeable upon the property of both husband and wife, or either of them, in favor of creditors therefor, and in relation thereto they may be sued jointly or separately.
In the gift tax return which petitioner filed she valued the gift of 50 shares of capital stock of Peoples Gas Light & Coke Co. at $4,400 and reduced this valuation to $1,650 by an exclusion of $2,750 which she explained in her return as follows:
The above gift was conveyed in trust by donor unto GEORGE J. RASSAS and FRANCES M. RASSAS, as Trustees for DENISE RASSAS, the daughter of donor, in accordance with a Trust Agreement dated December 29, 1947, a copy of which is hereto attached and hereby certified to be a true and correct copy. The said child was born December 10, 1947. The said Agreement conveys a present interest of 62.5% of the value thereof, or the sum of $2750.00, and a future interest equal to 37.5% of the value thereof, or the sum of $1650.00.
OPINION.
BLACK, Judge:
In the determination of a deficiency in petitioner's gift tax for the year 1947, the Commissioner has held that the gift which petitioner made to her infant daughter on December 29, 1947, was a gift of future interest in property and that no exclusion was allowable under the statute.
There is no dispute that the value of the donated property was $4,400 at the time of gift and there is no contention by the Commissioner that if petitioner is entitled to any exclusion at all that $2,750 is the correct amount. The Commissioner does contend, however, that the entire gift was one of future interest in property and that no exclusion is allowable. The petitioner on her part concedes that the gift of principal was one of future interest, but contends that the gift of income from the property was one of present interest and that she is entitled to an exclusion of $2,750.
The applicable sections of the Internal Revenue Code and of Treasury Regulations 108 are printed in the margin.
The pertinent part of the regulations printed in the margin is:
Internal Revenue Code.SEC. 1003. NET GIFTS.(b) EXCLUSIONS FROM GIFTS.—(3) (As added by section 454 of the Revenue Act of 1942.) GIFTS AFTER 1942.— In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year 1943 and subsequent calendar years, the first $3,000 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.Regulations 108.SEC. 86.11. FUTURE INTERESTS IN PROPERTY.— No part of the value of a gift of a future interest may be excluded in determining the total amount of gifts made during the calendar year. ‘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. The term has no reference to such contractual rights as exist in a bond, note (though bearing no interest until maturity), or in a policy of life insurance, the obligations of which are to be discharged by payment in the future. But a future interest or interests in such contractual obligations may be created by the limitations contained in a trust or other instrument of transfer employed in effecting a gift. * * *
* * * ‘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. * * *
This regulation has been construed many times by our own Court and by higher courts. One of the latest cases in the Supreme Court to deal with this regulation was Fondren v. Commissioner, 324 U.S. 18. In that case the Supreme Court held that a gift effective only in event of future need is not the same as a gift to satisfy existing needs, and in the former case the donor is not entitled to a statutory exclusion in computing gift taxes irrespective of whether the gift is to an adult or to an infant.
In the instant case the petitioner's daughter to whom the gift was made in trust was only 19 days of age at the time the gift was made but that fact would not make any difference if the gift was one of present interest in property. In contending that the entire gift was one of future interests in property the Commissioner strongly relies upon the Supreme Court's decision in the Fondren case, supra. We think that case supports the Commissioner's determination. 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, 130 F.2d 990; Commissioner v. Brandegee, 123 F.2d 58. See also our recent decision in Willis D. Wood, 16 T.C. 962.
Both parties agree that the determinative part of the trust instrument which controls the issue which we have here to decide is paragraph 3 which we have included in our findings of fact. That paragraph starts out by saying: ‘The Trustees shall pay the income of the Trust Estate unto DENICE RASSAS in quarterly installments.‘ If the trust instrument had stopped there we think the gift would undoubtedly have been one of present interest in the income of the trust, but it did not stop there. It continues by saying:
* * * Payment of such income to said minor shall be made by the Trustees paying and applying, in their sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said DENICE RASSAS during her minority, and any income not so paid and applied shall be accumulated by the Trustees during the minority of the said DENICE RASSAS, as and for her own separate property, and shall be paid to her upon her coming of age. * * *
In view of the facts which have been stipulated as to the favorable financial condition of Denice's parents, it seems extremely unlikely that the parents, as trustees, will deem it necessary to expend any of the income of the trust for Denice's maintenance, education, and support during her minority. It seems likely that the income, instead of being expended on her behalf for the above purposes, will be accumulated and invested from time to time and paid to her upon her coming of age as paragraph 3 provides. This being true, it seems to us that the facts bring this case within Fondren v. Commissioner, supra, and that the decision here must be for respondent.
Petitioner strongly relies upon Commissioner v. Sharp, 153 F.2d 163, affirming 3 T.C. 1062. We think that case is distinguishable. Of the trust indenture there involved the court said:
The most pertinent provision of the trust agreement, Article First, directs the trustee ‘to hold, manage, invest, and reinvest said trust estate, and to collect and receive rents, interest, income and dividends (hereinafter referred to as income) therefrom and after paying the proper charges against the same, to apply and pay over to the use and for the benefit of my son Donald Nichols Sharp the net income therefrom during his minority, and upon reaching majority to pay the net income to my said son Donald Nichols Sharp during his life. The trustee may make any payment of any income thus applicable to the use of my son Donald Nichols Sharp, during his minority, by paying the same to his mother, or guardian of his property, or corporation designated by the donor (without obligation to look to the proper application thereof by the person receiving it) or by expending it in such manner as the Trustee, in its discretion, believes will benefit my son. Any balance of income shall be accumulated until the arrival of my son Donald Nichols Sharp at majority, at which time the Trustee shall pay over the said accumulated income to my son Donald Nichols Sharp.‘
The court, construing the above provision of the trust indenture, said:
* * * Whenever the provision is made for immediate application of the funds for the minor's benefit whether of income or corpus, the exemption applies. The fund became available to the beneficiary here for his maintenance immediately upon consummation of the gift. He had at once the right of enjoyment. * * *
As we have already pointed out, the above cannot be said of Denice's right under the trust here involved. Her right to receive income from the trust was clearly limited by the following provision of the trust:
* * * Payment of such income to said minor shall be made by the Trustees paying and applying, in their sole discretion, so much of the income as may by them be deemed necessary for the maintenance, education and support of the said DENICE RASSAS during her minority, * * *
This limitation upon Denice's right to receive the income of the trust it seems to us makes the gift one of future interest under the Supreme Court's decision in the Fondren case, supra, and makes the gift here distinguishable from the one which was made in Commissioner v. Sharp, supra, where the Fondren case was distinguished.
We think the instant case is also distinguishable from the case of Kieckhefer v. Commissioner 189 F.2d 118, reversing 15 T.C. 111. Neither party cited the Kieckhefer case in their briefs but we have carefully read it and considered it and think it is distinguishable on its facts. The court in that case in deciding that the gift in trust by the donor to his infant grandson was one of present interest instead of future interest laid much emphasis on the following language in the trust indenture: ‘unless the trust by prior terminated as hereinafter provided.‘ In discussing the provision in the trust indenture to which we have just called attention, the court said:
Suppose in the instant situation that the beneficiary had been an adult rather than a minor. Such adult, of course, could immediately have made a demand upon the trustee and have received the trust property. We suppose that such a gift unquestionably would be one of a present interest. But because the beneficiary is a minor, with the disabilities incident thereto, it is reasoned that the gift is of a future interest because the disabled beneficiary is not capable of making demand.
The court then went on and disagreed with such reasoning and held that the gift was one of present interest.
The trust indenture in the instant case did not give to the beneficiary nor to any one acting for her the right to terminate the trust. Not only did the beneficiary have no right to terminate the trust in the instant case but neither the beneficiary nor any one acting for her has the right to demand payment of the income. Only such income of the trust estate is payable to the beneficiary as the trustees in their sole discretion shall decide. These facts, in our opinion, make the instant case distinguishable from Kieckhefer v. Commissioner, supra, and we think, under the cases which we have cited and discussed, make the gift here one of future interest.
Decision will be entered for the respondent.