Docket Nos. 53136 56173.
Joseph Shefner, Esq., for the petitioner. Claude R. Sanders, Esq., for the respondent.
Joseph Shefner, Esq., for the petitioner. Claude R. Sanders, Esq., for the respondent.
Under the terms of a trust created in 1949 by petitioner and her deceased husband for the benefit of their children, stock in a family corporation was transferred to the trustees with the provision that the corporation purchase each year so much of the trust stock as it shall determine and that the trustees will pay over the proceeds of such sale to the beneficiaries. In 1950 and 1951, petitioner contributed shares of stock in the corporation to the trust. Held, the gifts of stock in 1950 and 1951 were gifts of future interests within the meaning of section 1003(b)(3) of the Internal Revenue Code of 1939. Held, further, the amount of specific exemption to which petitioner is entitled on her 1950 gift tax return is as determined by respondent.
Respondent determined deficiencies in gift tax of petitioner as follows:
+--------------------+ ¦Year ¦Deficiency ¦ +------+-------------¦ ¦ ¦ ¦ +------+-------------¦ ¦1950 ¦$748.99 ¦ +------+-------------¦ ¦1951 ¦736.98 ¦ +--------------------+
The questions for decision are whether certain gifts of shares of stock made by petitioner in 1950 and 1951 in trust for the benefit of three of her children were gifts of future interests in property within the meaning of section 1003(b)(3) of the Internal Revenue Code of 1939, and the amount of specific exemption to which petitioner is entitled with respect to gifts made by her in 1950.
FINDINGS OF FACT.
Some of the facts are stipulated and are incorporated herein by this reference.
Petitioner resides at Minneapolis, Minnesota. She was the wife of Harry W. Goldstein, who dies testate on August 10, 1950. Bernard Gale, Jerome Gale, Eileen Winer, Leonard Gale, and Rita Abramson are the children of petitioner and Harry Goldstein. She filed gift tax returns for 1950 and 1951 with the collector of internal revenue for the district of Minnesota.
On October 31, 1949, petitioner and her husband owned all of the outstanding capital stock of the Standard Plumbing Supply Co., Inc. (hereinafter referred to as the corporation), a corporation organized and existing under the laws of Minnesota, in the following amounts:
+-------------------------------------------------------------+ ¦ ¦No. of class A ¦No. of class B ¦ +------------------+-----------------------+------------------¦ ¦Stockholder ¦voting capital shares ¦nonvoting shares ¦ +------------------+-----------------------+------------------¦ ¦ ¦ ¦ ¦ +------------------+-----------------------+------------------¦ ¦Harry W. Goldstein¦5.1 ¦249.9 ¦ +------------------+-----------------------+------------------¦ ¦Celia Goldstein ¦4.9 ¦240.1 ¦ +-------------------------------------------------------------+
On December 27, 1949, petitioner, Harry Goldstein, the corporation, Joseph Shefner, Harry Gainsley, Bernard Gale, and Jerome Gale, entered into a trust agreement which provides, inter alia:
THIS AGREEMENT, made and entered into by and between:
Harry W. Goldstein, and Celia Goldstein, husband and wife, hereinafter referred to as Settlors;
Joseph Shefner and S. Harry Gainsley, hereinafter referred to as Trustees;
Standard Plumbing Supply Company, Inc., hereinafter referred to as Corporation;
Bernard Gale and Jerome Gale, two of the children of the above named Settlors.
WHEREAS, the Settlor, Celia Goldstein, is the owner of 4.9 class ‘A’ capital voting shares and 240.1/10 class ‘B’ non-voting capital shares of the above named Corporation, and,
WHEREAS, the said Settlor, Harry W. Goldstein, is the owner of 5.1 class ‘A’ voting capital shares and 249.9/10 class ‘B’ non-voting capital shares of said corporation, and,
WHEREAS, the Settlors are the parents of children named as follows: Bernard Gale, Jerome Gale, Eileen Winer, Leonard Gale and Rita Abramson, and,
WHEREAS, the Settlor Celia Goldstein, has placed in the hands of said Trustees 54 class ‘B’ non-voting capital shares of said Corporation and contemplates placing additional shares in the hands of the Trustees from time to time hereafter, and,
WHEREAS, the Settlor, Harry W. Goldstein, has placed in the hands of said Trustees 4 class ‘B’ non-voting capital shares of said Corporation and likewise intends to place additional shares in the hands of said Trustees, from time to time, hereafter, and,
WHEREAS, it is the purpose of Settlors to preserve said corporation for their sons, Bernard and Jerome, but at the same time to provide a means by which the other three children can eventually obtain for themselves in money the book value of three-fifths of all of their shares in said Corporation either during their life time or after their death, and,
WHEREAS, the Settlors have prepared their Last Will and Testament by which, among other things, they have provided for the distribution of their class ‘A’ voting shares to their sons, Bernard and Jerome, equally, they being actively engaged in said corporate business,
NOW THEREFORE, for valuable consideration the following agreement is entered into between all the parties herein:
That said Celia Goldstein does by these presents irrevocably give, transfer and assign unto said Trustees, their successors in trust, for the trust purposes herein expressed, 54 shares of Class ‘B’ non-voting shares and the same are accepted by the Trustees in trust for the following purposes:
A. At the close of each fiscal year of said Corporation should the Corporation be in a position to comply with the statutes of the State of Minnesota governing retirement of its stock, it shall purchase so many of the shares in the hands of the Trustees as it shall determine, but in no event shall it purchase in excess of $3,000.00 worth of said shares in any one year while either of the Settlors are living. The price to be paid for such stock shall be based upon book value of said stock as established at the close of each fiscal year. The proceeds derived from such sale of said shares shall forthwith be paid over to the said last three named children, share and share alike, and the shares so purchased by the Corporation shall be forthwith cancelled on the books and records of the company.
B. In the event of the death of both of the Settlors, the book value of the shares then remaining in the hands of the Trustees shall be determined by reference to the last financial statement next preceding the death of the last of the survivor of said Settlors to which should be added the profits or deducted the losses gained or suffered during the time of said financial statement and said death. Within 12 months from the date of said death, the Trustees shall turn over and deliver to Bernard and Jerome for their equal benefit and without cost, class B, non-voting shares then in their hands in excess of 3/5 of the total stock which the Settlors may have owned in their lifetime, and within such period, the said Sons, Bernard and Jerome, shall jointly and severally purchase from said Trustees all of the remaining shares in the said Trustees hands and shall pay for the same as follows: 10% of said value within 12 months from the date of such death and the balance to be paid in equal annual installments for 10 successive years thereafter. No interest shall be paid upon the unpaid balance. Trade name and good will shall not be considered assets for the purpose of determining book value. As payment is made for said shares the same shall forthwith be assigned to said sons equally.
So long as the Trustees shall hold any of said shares either during or after the lifetime of both Settlors, and should dividends be declared by said Corporation upon the same, the amount paid on the shares held by the Trustees shall be credited toward the purchase and payment of such shares in the hands of said Trustees and distributed to the beneficiaries of the trust.
Should the corporation and/or the said sons, Bernard and Jerome, fall or refuse to purchase said shares as herein provided, the Trustees at their option and in their discretion may take such steps as may be necessary for the liquidation and dissolution of said Corporation and to apply any undistributed surplus in the hands of the Corporation toward the purchase and payment of the shares in the hands of said Trustees and should there remain a balance thereafter, the same shall be paid to said Bernard and Jerome. For the purpose of making this provision effective it is agreed that said above named Trustees or their successors in trust be and are hereby appointed proxies representing all class ‘A’ voting shares now standing in their respective names for the purposes of voting for the termination and dissolution of said corporation in the event of such default and not otherwise.
Should the Corporation cease doing business, become bankrupt, enter receivership or be dissolved, the liability of the said Bernard and Jerome Gale for the purchase of the shares in the hands of the Trustees shall cease and terminate but any proceeds left for distribution among the shareholders shall first be used to purchase the remaining shares and the balance shall belong to said Bernard and Jerome Gale equally.
Any gift or transfer made by the Settlors herein of any of said corporate stock is and shall be irrevocable and the same shall not be returned or rescinded nor shall the Trustees be obligated to surrender said stock except as herein provided.
The corporation never paid or declared any dividends.
During the year 1949 petitioner and her husband made a gift of 54 shares of class B common stock of the corporation to Joseph Shefner and Harry Gainsley, trustees, on behalf of Rita Abramson, Leonard Gale, and Eileen Winer. The value of the gift was $26,070.66. In her gift tax return for 1949, petitioner treated this gift as a gift of a one-third interest in the 54 shares of stock to each of the three children named. Petitioner excluded a total of $9,000 from the gift and utilized as a deduction $5,000.91 of the specific exemption.
In 1950, pursuant to the 1949 agreement, petitioner made a gift to Joseph Shefner and Harry Gainsley, trustees, of 42 shares of class B common stock, on behalf of Leonard Gale, Eileen Winer, and Rita Abramson. The value of this gift was $21,919.39. In addition, petitioner gave 14 shares of class B common to Bernard and 14 shares to Jerome. In her gift tax return for 1950 petitioner excluded a total of $15,000, and deducted the amount of $21,532.30 as specific exemption.
In 1951, pursuant to the 1949 agreement, petitioner made a gift of 15 shares of class B common stock to Harry Gainsley and Joseph Shefner, trustees, for Leonard Gale, Eileen Winer, and Rita Abramson. The value of the gift was $8,190.30. Petitioner made two separate gifts of 5 shares of class B common stock each to Bernard R. Gale and Jerome B. Gale. In her gift tax return for 1951, petitioner excluded a total of $15,000 from the total gifts for the year.
During the period from January 3, 1951, to April 7, 1955, the trust created on December 27, 1949, received a total of $15,000 from the corporation to retire stock held by the trustees. During the same period, $1,339.22 was disbursed by the trustees to meet charges and fees incurred in administering the trust, and $13,650 was distributed to the three beneficiaries of the trust.
In a complaint filed in the United States District Court for the District of Minnesota, Fourth Division, Joseph Shefner and Harry Gainsley, as trustees and transferees of Harry Goldstein, brought an action against A. R. Knox director of internal revenue, to recover additional gift tax assessed against and collected from them. The complaint alleged that Harry Goldstein in a gift tax return for 1949 reported gifts of securities valued at $1,931.16 to Shefner and Gainsley, trustees of the trust for the equal benefit of his three children, Leonard Gale, Eileen Winer, and Rita Abramson. The complaint further alleged that in the return Harry Goldstein deducted three annual exclusions amounting to $9,000 and that the Commissioner disallowed the exclusions on the ground that the gifts in trust were gifts of future interests.
By letter dated June 13, 1952, petitioner authorized the Commissioner to deduct additional specific exemption from her previous gifts in the amount of $9,000. The authorization was to apply after the District Court action involving Harry Goldstein was finally adjudicated. On July 16, 1955, the District Court rendered judgment for defendant in the case of Joseph Shefner and S. Harry Gainsley, Trustees and Transferees v. A. R. Knox, Director of Internal Revenue, and upheld the Commissioner's disallowance of a $9,000 exclusion for the gift to the trust.
In determining the deficiency against petitioner for 1950, the respondent added to the amount of specific exemption claimed in the 1949 gift tax return $9,000 additional exemption authorized by the letter dated June 13, 1952. Petitioner's total specific exemption remaining in 1950 was $15,999.09. Of the $15,000 in exclusions claimed by petitioner in the 1950 gift tax return, the respondent disallowed $9,000 on the ground that the gift to the trust in 1950 on behalf of the three beneficiaries was a gift of a future interest.
In determining the amount of deficiency for 1951, the respondent disallowed exclusions for the gift of 15 shares of common stock from petitioner to the trustees on the ground that the gift was a gift of future interests.
Under the terms of an agreement executed on December 27, 1949, petitioner Celia Goldstein and her husband, Harry Goldstein, now deceased, transferred certain shares of stock in a family-owned plumbing supply corporation to Joseph Shefner and Harry Gainsley. The announced purpose of the agreement is to preserve the corporation for two of the Goldstein's children, Bernard and Jerome, who have been active in the business, but at the same time to provide a means by which the other three Goldstein children can obtain in money the book value of three-fifths of all of the shares of the corporation. To accomplish this purpose, the agreement provides that at the close of each fiscal year the corporation shall purchase so many of the shares in the hands of Shefner and Gainsley as the corporation shall determine, but no more than $3,000 worth of shares in any one year while either petitioner or her husband is alive. The proceeds from the sale of such stock to the corporation are to be paid over to the other three children in equal shares, and any dividends received on the stock held by Shefner and Gainsley are to be credited toward the purchase of more shares. The agreement further provides that if both petitioner and her husband die, Bernard and Jerome will purchase any remaining stock held for the benefit of the three remaining children. If the corporation or the sons fail to purchase shares as provided in the agreement, Shefner and Gainsley are empowered to liquidate the corporation and to apply any undistributed surplus toward the purchase of the shares.
The obvious result intended by this arrangement is an eventual transfer of all of the capital stock to the sons actively engaged in the business. The agreement was drawn up, however, so that shares of stock owned by the parents will be transferred to Shefner and Gainsley, as trustees, for the benefit of the three children who are not active in the business. As the stock is purchased from the trustees and retired by the corporation, the amounts received are then turned over to the three beneficiaries. The agreement further contemplates that petitioner will from time to time place additional shares of stock in the hands of the trustees, presumably until the entire capital stock of the corporation has been transferred. In accord with this plan, petitioner placed $21,919.38 worth of stock in the hands of the trustees in 1950, and $8,190.30 worth in 1951. In her gift tax returns for those years, petitioner proceeded on the theory that each gift of stock was in fact a gift of a one-third interest to each of the beneficiaries named in the 1949 agreement. Therefore, in her returns for 1950 and 1951, petitioner excluded $3,000 for each child, or a total exclusion of $9,000 for each year. Respondent disallowed the $9,000 exclusion for both years on the ground that the gift of stock to the trustees for the benefit of the three children was a gift of future interests.
Petitioner first contends that the 1949 agreement is not a trust but is a ‘buy and sell’ agreement under which the ‘trustees' act as a mere conduit for the transfer of cash to the three named children. This contention is without merit.
A trust has been defined as a ‘fiduciary relationship with respect to property, subjecting the person by whom the property is held to equitable duties to deal with the property for the benefit of another person, which arises as a result of a manifestation of an intention to create it.’ Restatement, Trusts sec. 2; 1 Scott, Trusts sec. 2.3. ‘Manifestation of intention’ means the external expression of intention as distinguished from undisclosed intention. Restatement, Trusts sec. 4. The trust instrument itself is the best evidence of ‘manifestation of intention,‘ but an express trust may be created even though the parties do not call it a trust, if what is done has the essentials of a trust. 1 Scott, Trusts sec. 2.8.
The 1949 agreement in issue here has every characteristic of a bona fide trust. Petitioner and her husband, referred to in the agreement as settlors, entered into an agreement with Joseph Shefner and Harry Gainsley, referred to in the agreement as trustees, whereby the settlors transferred shares of the capital stock of the family corporation to the trustees for the benefit of three of the settlors' children. By the express terms of the instrument, the trustees were subjected to certain duties with respect to this stock, which included the paying over to the beneficiaries of proceeds received from the corporation upon the purchase and retirement of shares of stock held by the trustees. The trustees were further directed to credit any dividends received by them with respect to the stock held in trust toward the purchase of such shares. Other powers were given to the trustees, all of which dealt with the property transferred to them for the benefit of the settlors' children. The trustees have fully carried out all of the duties imposed upon them. We therefore hold that the 1949 agreement created a valid trust.
The primary issue is whether the gifts of stock to the trustees in 1950 were gifts of future interests within the meaning of section 1003(b)(3), Internal Revenue Code of 1939. That section provides for maximum annual exclusion of $3,000 in the case of gifts other than of future interest in property made after 1942.
Subsection (b)(3) which was added to section 1003 of the Internal Revenue Code of 1939 by section 454 of the Revenue Act of 1942, provides:SEC. 1003. NET GIFTS.(b) EXCLUSIONS FROM GIFTS.—(3) 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.
Congress has defined the term ‘future interests in property’ as ‘any interest or estate, whether vested or contingent, limited to commence in possession or enjoyment at a future date.’ H. Rept. No. 708, 72d Cong., 1st Sess., p. 29 (1939-1 C.B. (Part 2 478); S. Rept. No. 665, 72d Cong., 1st Sess., p. 41 (1939-1 C.B. (Part 2) 526). The term ‘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.’ Regs. 108, sec. 86.11.
Whatever puts the barrier of a substantial period between the will of the beneficiary or donee presently to enjoy what has been given him and that enjoyment makes the gift one of a future interest within the meaning of the regulation. Fondren v. Commissioner, 324 U.S. 18 (1954). Thus, if enjoyment is postponed by reason of a trust provision that the trustee may, in his discretion, pay income from trust property to the donee or accumulate it until a specified contingency occurs, the income interest is a future one. Welch v. Paine, (C.A. 1, 1942) 130 F.2d 990; Commissioner v. Brandegee, (C.A. 1, 1941) 123 F.2d 58. Even if the income is required to be distributed by the trustee, but distribution of trust corpus is postponed, the gift of corpus is a future interest. Fisher v. Commissioner, (C.A. 9, 1942) 132 F.2d 383, affirming 45 B.T.A. 958; Sensenbrenner v. Commissioner, (C.A. 7, 1943) 134 F.2d 883, affirming 46 B.T.A. 713.
By the terms of the trust agreement involved here, the trustees are directed to pay over the proceeds derived from the sale of shares of stock held in trust to the three named beneficiaries ‘forthwith.’ Any dividends declared upon the trust stock are to be credited toward the purchase of more trust shares. However, the corporation alone may purchase the shares of stock held by the trustees. And if the corporation complies with the statutes of Minnesota governing retirement of its stock, it may purchase so many shares as it shall determine.
Clearly the trustees have no discretion to delay payment of proceeds received from the sale of trust stock. But the trustees are subject to the control of the corporation, for it and it alone has the power to determine whether or not the trust stock will be purchased and retired. If the corporation chooses not to purchase any stock in a given year, the trustees cannot distribute any of the trust corpus to the beneficiaries because only the ‘proceeds derived from the sale’ of trust shares are to be paid out. Nor does the trust agreement contain any limitation upon the corporation's discretion in this regard. The corporation is not required to purchase any number of shares each year and there is no provision whereby any of the beneficiaries or the trustees may make demand upon the corporation to retire any of the stock held in trust. Even if a provision for demand had been included in the trust instrument, the corporation may not purchase a single share of stock without first complying with the Minnesota law governing a corporation's purchase or redemption of its own shares, a contingency that might further postpone the donees' enjoyment of the property.
Minn. Stat. sec. 301.22 (1953), provide:Subd. 6. Purchase or redemption of shares of own stock. A corporation may purchase or redeem shares of its own stock, whether pursuant to contract previously made or otherwise, only as follows:(1) Out of earned surplus;(2) Out of paid-in surplus; provided, that, if the corporation has outstanding shares entitled to preferential dividends or to a preference upon liquidation, then only such shares may be purchased or redeemed out of paid-in surplus.
Moreover, the trustees cannot, under the terms of the trust, sell the stock to any purchaser other than the corporation. The agreement expressly provides that if the corporation fails or refuses to purchase any shares from the trustees, then the trustees have discretion to take such steps as may be necessary to liquidate and dissolve the corporation and to apply any undistributed surplus toward the purchase of such shares. Obviously, if the surplus is not sufficient to cover the book value of the remaining shares in the hands of the trustees, the beneficiaries will never receive the full enjoyment of the trust property. And if the corporation ceases doing business, becomes bankrupt, or enters receivership, the agreement further provides that the beneficiaries will receive as their shares of the trust property only the proceeds remaining for distribution among all of the stockholders of the corporation. Since the interests of the beneficiaries are securely tied to the success or failure of the corporation, it is clear that they have no right to the immediate enjoyment of the trust property.
In Willis D. Wood, 16 T.C. 962, it was held that if discretion to determine enjoyment and use of a gift is placed in someone other than the trustee, the donee's interest is a future one. The interests of the three Goldstein children under the 1949 trust were at all times subject to the discretion of the corporation. Unless it complied with State law and determined to purchase trust stock, the trustees were powerless to make any distribution. Thus, the unbridled discretion of the corporation placed a barrier ‘between the will of the beneficiary or donee now to enjoy what has been given him and that enjoyment.’ Fondren v. Commissioner, supra. Accordingly, we hold that petitioner's gifts of stock to the trust in 1950 and 1951 were gifts of ‘future interests' not entitled to the annual exclusion. Commissioner v. Kempner, (C.A. 5, 1942) 126 F.2d 853, affirming Tax Court Memorandum Opinion dated Feb. 28, 1940; Commissioner v. Sharp, (C.A. 9, 1946) 153 F.2d 163, affirming 3 T.C. 1062, cited by petitioner, are distinguishable. In those cases neither the trustee nor anyone else had discretion to postpone the enjoyment of the gift property.
Gifts of stock in 1949 from petitioner and her husband to the trust have been held to be gifts of future interests to the three children-beneficiaries. Shefner v. Knox, 131 F.Supp. 936 (1955). We reach the same conclusion as to the gifts of stock made by petitioner to the trust in 1950 and 1951.
Decision will be entered for the respondent.