Opinion
Docket No. 22516.
1951-08-13
SYLVIA H. EVANS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Morse Garwood, Esq., for the petitioner. Albert J. O'Connor, Esq., for the respondent.
GIFT TAX— EXCLUSIONS— Not allowable where present interest in income of trust is incapable of valuation because trust agreement permitted total exhaustion of trust corpus. William Harry Kniep, 9 T.C. 943,affd. 172 F.2d 755, followed. Morse Garwood, Esq., for the petitioner. Albert J. O'Connor, Esq., for the respondent.
This proceeding involves gift tax deficiencies of $371.56 for 1945, and $1,598.55 for 1946.
FINDINGS OF FACT.
Petitioner is a resident of Philadelphia, Pennsylvania. The returns for the years involved were filed with the collector for the first district of Pennsylvania at Philadelphia.
Part of the facts were stipulated and are so found.
On December 31, 1945, petitioner created a trust for the benefit of her six children. The property transferred to the trustees was set apart for the primary benefit of each child as a separate trust for each. It was provided in article 1 of the trust deed as follows:
1. (a) During the lifetime of each such child Trustees shall pay the net income in quarterly or other convenient installments to him or her, even though a minor, and in addition such sum or sums from principal as in the uncontrolled discretion of the corporate trustee shall be necessary for the education, comfort and support of such child, or of the spouse or children of such child.
(b) Each child after attaining the age of thirty (30) years shall have the right to withdraw principal of his or her trust to an amount not exceeding one thousand dollars ($1,000) in any one calendar year.
Petitioner's children were born on the dates shown below:
+------------------------------+ ¦Sylvia E. Taylor ¦8/29/1915 ¦ +-------------------+----------¦ ¦Margaret E. Carson ¦8/14/1916 ¦ +-------------------+----------¦ ¦Nathaniel H. Evans ¦11/ 7/1917¦ +-------------------+----------¦ ¦Faith E. Blakely ¦5/27/1921 ¦ +-------------------+----------¦ ¦Thomas Evans ¦1/21/1923 ¦ +-------------------+----------¦ ¦Anna Evans ¦11/22/1927¦ +------------------------------+
During the year 1945 petitioner put in said trust $2,500 for each of her children and made other direct gifts to each of them in amounts ranging from $100 to $400 and totaling $1,350.
During 1946 petitioner put in said trust an additional $5,000 for each child and made a direct gift of $100 to each.
No withdrawals by or payments to any of petitioner's children have been made from the principal of the trusts created by the deed of trust, but the income has been distributed currently.
In her gift tax return for 1945 petitioner claimed exclusions from the gifts made to her children totaling $12,284.39. Of this amount respondent allowed $2,350 which included $1,000 in connection with the gift made to the trust for Sylvia E. Taylor. Respondent explained in the statement accompanying the notice of deficiency that the $1,000 was allowed ‘since she (Sylvia) could, by reason of the fact that she was 30 years of age, withdraw this amount immediately from her share of the principal of the trust.‘ The balance of the allowed exclusions represented direct gifts made to the children. Respondent disallowed exclusions taken in connection with gifts to the trust created December 31, 1945.
In her return for 1946 petitioner claimed an exclusion of $3,000 from the gifts to each child, or a total of $18,000. Respondent disallowed exclusions taken in connection with the 1946 gifts made to the trust created December 31, 1945. In each instance this disallowance was explained in the statement attached to the notice of deficiency as follows:
Under the terms of the trust created by you on December 31, 1945, the corporate trustee may, in its uncontrolled discretion, distribute such sum or sums from the trust principal as it deems necessary for the education, comfort and support of each beneficiary, or of the spouse or children of such beneficiary. It is therefore held that the amount of the income which will be distributed to each beneficiary from his or her share of the trust estate is not susceptible of determination and that, under such circumstances, no exclusions are allowable with respect to the gifts made of the right to receive income from the property transferred.
OPINION.
TIETJENS, Judge:
In our opinion the primary issue in this case, whether petitioner is entitled to any exclusion
other than the $1,000 allowed for 1945 in computing the value of her net gifts by reason of the gifts made in 1945 and 1946 to the trusts, is governed by William Harry Kniep, 9 T.C. 943, affd. 172 F.2d 755, as contended by respondent.
Section 1003(b)(3), Internal Revenue Code, provides for an exclusion of the first $3,000 of any gift, ‘other than gifts of future interests in property.‘
That case involved a trust for the benefit of petitioner's five nephews and nieces and a relative of his wife. Each beneficiary was entitled to income from the trust until each reached the age of 60. The trustee, however, was authorized to encroach upon principal for the benefit of any beneficiary to provide for support and maintenance in an amount not to exceed $1,000 in any year for any beneficiary. We held that the gifts of trust income ‘were capable of valuation, and therefore, subject to the statutory exclusion, only to the extent to which they were not exhaustible by the exercise of the right of the trustee to encroach upon the trust corpus.‘ (Emphasis added.)
In the case at hand the trustees were directed to pay over net income to each beneficiary for life and in addition such sum or sums from principal as the corporate trustee in its uncontrolled discretion determined shall be necessary for the education, comfort, and support of the beneficiary or the spouse or children of such beneficiary. The corpus of each trust were therefore entirely exhaustible by the trustee in its uncontrolled discretion and, applying the principle of the Kniep case, the gift of income from the trust was incapable of valuation.
Petitioner seeks to distinguish the Kniep case on the ground that there a single trust with six beneficiaries was involved, while here we have separate trusts for each of the six beneficiaries, also on the ground that each beneficiary in the Kniep case had an estate for a term of years with the right to receive principal if he or she survived the term, while here each beneficiary has a life estate with certain additional rights to principal. These differences do not seem to us to be significant.
Nor does the fact that the payments from principal in this case are to be made only to the beneficiary appear to be important. Our problem is to value the present interest of each beneficiary, the right of each to trust income, as of the time of the gifts. As the Court of Appeals said in the Kniep case, ‘the only certainty as of the time of the gifts is that the beneficiaries will receive trust income from the corpus, reduced annually by the maximum extent permitted under * * * the trust agreement.‘ As we have said above, the trust agreement here permitted total exhaustion of trust corpus. Accordingly, the present interests here were incapable of valuation and we hold that the respondent was correct in his disallowance of the claimed exclusions.
In the event the respondent is sustained on the foregoing issue (and we have so decided), petitioner contends she is entitled to an exclusion of $1,000 in connection with the gift of $5,000 made in 1946 to the trust for the benefit of Sylvia E. Taylor. We turn now to that question. The deed of trust gave each beneficiary the right upon attaining the age of 30 to withdraw principal of his or her trust to an amount not exceeding $1,000 in any one year. Sylvia was 30 when the trust was created on December 31, 1945, and therefore immediately was entitled to withdraw that amount from the principal of her trust. Accordingly, petitioner was allowed an exclusion of $1,000 in 1945 on account of the gift made in that year to the trust for Sylvia. Petitioner now claims a similar exclusion for 1946 in connection with the $5,000 which she added to Sylvia's trust in 1946.
We are unable to agree with petitioner's claim. Sylvia's right to receive $1,000 per year from trust corpus was, except for the year 1945, a future interest at the time the trust was created. Petitioner's addition of $5,000 to the trust in 1946 conferred no present right on Sylvia in that year. She already possessed the right on January 1, 1946, to draw down an additional $1,000, or the cumulative amount of $2,000. As the principal of her trust at that time was already $2,500, and thus sufficient to cover the withdrawals to which she was entitled, petitioner's gift of an additional $5,000 to the trust was the gift of a future interest. We hold that petitioner is not entitled to the claimed exclusion in 1946 for the gift of $5,000 to the trust for Sylvia E. Taylor.
Petitioner also contends in her petition that in the event both the above issues are decided against her (which is the case) that she should be allowed to claim so much of her specific exemption as will eliminate the net gifts for 1945 and to apply the balance of the exemption in reduction of the net gifts for 1946. The extent to which petitioner has claimed and has been allowed any portion of her specific exemption of $30,000, as provided in section 1004(a)(1), Internal Revenue Code, in the computation of gifts taxes, if any, for years prior to the taxable years in question, is a matter which respondent may easily ascertain from his records. The petitioner's claim in this proceeding to her presently unused specific exemption will be given effect under a Rule 50 computation.
Decision will be entered under Rule 50.