Opinion
Docket Nos. 17794 19081.
1949-02-21
JESSE S. PHILLIPS, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas H. Bivin, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
1. Gifts of life insurance policies made in 1944 by taxpayer in trust for the benefit of his wife, son, daughter, and two grandsons, held, gifts of future interests.
2. Gifts of securities made at the same time by taxpayer in trust for the benefit of two granddaughters, with direction to trustees to pay net income to each beneficiary quarterly or to her guardian or other designated person until 18 years of age, at which time the beneficiary was to receive the corpus, held, gifts of present interests as to right to receive income, but not as to corpus.
3. Gift made in 1946 by taxpayer of securities to the trust created in 1944 for the benefit of his wife, held, gift of future interest as to corpus. Thomas H. Bivin, Esq., for the petitioner. Ellyne E. Strickland, Esq., for the respondent.
The Commissioner determined deficiencies in gift tax for 1944 and 1946 in the amounts of $1,258.21 and $2,469.76, respectively. The question to be determined is whether certain gifts made by petitioner in 1944 and 1946 under the trusts created by him in 1944 were transfers of future interests within the meaning of section 1003(b)(3) of the Internal Revenue Code so that no exclusions, except as conceded by respondent, are allowable with respect thereto. The facts were stipulated.
FINDINGS OF FACT.
The petitioner resides at 25 Dellwood Road, Bronxville, New York. He filed timely gift tax returns for the years 1944 and 1946 with the collector of internal revenue at Albany, New York.
On December 28, 1944, the petitioner made seven gifts under an irrevocable trust agreement of the same date between petitioner, as grantor, and William J. Ahearn and Francis W. Phillips, as trustees.
The trust agreement is included herein by reference. It provides that, subject to the provisions of articles second and third, the trustees shall hold the property described in schedules A, B, C, D, E, F, and G, annexed thereto, together with any property which may thereafter be conveyed, each as a separate trust; to invest and reinvest the same and, after paying the reasonable and proper expenses of the trust, to pay and distribute the principal thereof and the net income therefrom in accordance with the terms of the trust agreement.
The property described in schedule A was to be set aside for the benefit of Emily Rosebery Phillips, wife of the grantor, and the trustees were directed:
* * * to pay the net income therefrom to her for and during the term of her natural life, provided that if the net income therefrom is inadequate for her proper support, maintenance and medical care, the Trustees then shall pay to her from the principal of such trust estate such amount or amounts as may be necessary for her proper support, maintenance and medical care, and upon the death of
Emily Rosebery Phillips, to pay and distribute the principal of the trust estate, as it shall then exist, to Francis W. Phillips and Mary Phillips Galloway, son and daughter, respectively, of the grantor, in equal shares, or, if the son or daughter be then not living, to the surviving issue of each of them in equal shares per stirpes.
The property described in schedules B and C was to be set aside in trust for the benefit of grantor's above named son and daughter, respectively, and the trustees were directed to pay the net income from each trust to the beneficiary thereof until December 31, 1949, and on that date to pay the principal to the beneficiary, if living, or, in the event of the prior death of the beneficiary, to his or her estate.
The property described in schedules, D, E, F, and G was to be set aside in trust for the benefit of the grantor's granddaughters and grandsons, Dorothy Ann Phillips, Virginia Phillips, John Henry Galloway III, and Peter Phillips Galloway, respectively, and the trustees were directed to pay the net income therefrom to each beneficiary until she or he attained the age of 18 years, at which time the principal of each trust estate was to be paid to the beneficiary thereof, or, in the event of the prior death of the beneficiary, to her or his estate.
Payments of net income to beneficiaries were to be made by the trustees on March, June, September, and December first of each year.
Article second provides that, whenever payment of any income is to be made to a beneficiary who is a minor:
* * * payments of such income may be made to the guardian of such minor or to the natural parents of such minor, or either of them, and the receipt of such guardian or natural parents, or either of them, shall be a full discharge to the Trustees for such payments. * * *
Article third, after granting broad powers of investment to the trustees, provides as follows:
The Trustees shall during the life of the Grantor pay premiums upon life insurance policies that become due and payable, which policies form the principal of these trusts in whole or in part, same to be paid from cash seasonably furnished by the Grantor for that purpose; from cash realized by selling, borrowing upon any other securities or other property constituting the principal of the trust or by surrendering the policies, borrowing upon them or exercising any option under them for the automatic application of loan provisions to the payment of future premium or otherwise.
Upon the execution and delivery of the trust agreement of December 28, 1944, the petitioner, as grantor, delivered to the trustees the property described in the schedules A, B, C, D, E, F, and G.
In his gift tax return for 1944, the petitioner reported the seven gifts made by him in trust at a total value of $21,318.56 and claimed deductions for exclusions in the total amount of $17,752.21, as follows:
+---------------------------------------+ ¦Schedule “A”—Emily Rosebery Phillips:¦¦¦ +---------------------------------------+
Policy #1667734, Metropolitan Life Ins. Co., effective Exclusion Value Aug. 7, 1915 (future interest not excluded) $3,146.29 Schedule “B”—Francis W. Phillips: Policy #2234530, Mutual Life Ins. Co., of New York, effective June 2, 1915 $3,000.00 3,219.05 Schedule “C”—Mary Phillips Galloway: Policy #2075058, Prudential Ins. Co. of America, effective Nov. 4, 1915 3,000.00 3,152.60 Schedule “D”—Dorothy Ann Phillips: (3) U. S. savings bonds, series F 2,220.00 (50) shares capital stock Great Amer. Indemnity Co 725.00 2,945.00 2,945.00 Schedule “E”—Virginia Phillips: (3) U. S. savings bonds, series F $2,220.00 (50) shares capital stock Great Amer. Indemnity Co 725.00 $2,945.00 2,9450.00 Schedule “F”—John Henry Galloway, III: Policy #543409, Equitable Life Assur. Society, effective July 27, 1891 926.00 Policy #2197755, Equitable Life Assur. Society, effective Nov. 22, 1916 646.21 Policy #630577, Northwestern Mutual Life Insurance Co., Milwaukee, Wisconsin, effective Aug. 17, 1905 1,000.00 (20) shares capital stock Great Amer. Indemnity Co 290.00 2,862.21 2,862.21 Schedule “G”—Peter Phillips Galloway: Policy #8127725, New York Life Ins. Co., effective Nov. 3, 1921 3,000.00 3,048.41 Total value of gifts 21,318.56 Total exclusions 17,752.21
The petitioner thus reported the amount of net gifts for the year to be $3,566.35, upon which a tax of $80.24 was assessed and paid.
The petitioner made no other taxable gifts during 1944. The aggregate value of the gifts made by the petitioner during 1944 was $21,318.56.
The respondent disallowed the deduction of the exclusions claimed by the petitioner totaling $17,752.21, on the ground that the gifts under the trust created by the petitioner on December 28, 1944, constituted gifts of future interests, for which no exclusions are allowable, under section 1003(b)(3) of the Internal Revenue Code. Respondent concedes that in computing his gift tax liability for 1944 petitioner is entitled to deductions of $617.52 and $955.46 representing exclusions to the extent of the value of the right of the beneficiary to receive income from the trust in favor of Dorothy Ann Phillips and the trust in favor of Virginia Phillips.
In his gift tax return for 1946, under ‘Schedule A,‘ the petitioner reported gifts made by him on March 15, 1946, consisting of certain securities valued at $102,179, which securities were transferred in trust for the benefit of petitioner's wife, under the provisions of the trust agreement dated December 28, 1944.
The securities listed in the gift tax return for 1946 had a total value of $102,179 on March 15, 1946, and were delivered by petitioner on that date to the trustees. The petitioner made no other taxable gifts during 1946.
In his gift tax return for 1946 petitioner took as a deduction the specific exemption of $30,000, leaving $72,179 to represent the amount of net gifts for the year. For the purpose of computing the tax, the petitioner added to this amount of $72,179 the sum of $3,566.35 which he had previously returned as the amount of net gifts for 1944, making a total of $75,745.35, upon which a tax of $10,351.28 was assessed and paid.
In determining the petitioner's gift tax liability for 1946, the respondent included net gifts for 1944 in the sum of $21,318.56 and added this sum to $72,179, which latter amount was the amount of net gifts for 1946 as returned by the petitioner. The respondent concedes that, in computing his gift tax liability for 1946, petitioner is entitled to a deduction of $3,000 representing the exclusion allowable on account of the value of the right of the beneficiary, Emily R. Phillips, to receive the income from the securities transferred in the taxable year to the trust in her favor.
On the date of the creation of the above mentioned trusts the petitioner's wife, his two children, and his four grandchildren, all of whom are named as beneficiaries under the terms of the trust agreement, were all living and still are. Emily R. Phillips was born on March 20, 1906; Dorothy A. Phillips was born on February 15, 1933; Virginia Phillips was born on June 1, 1937; John Henry Galloway, III, was born on August 29, 1939; and Peter Phillips Galloway was born on August 31, 1941.
OPINION.
VAN FOSSAN, Judge:
The question involved is whether the petitioner is entitled, in computing his gift taxes for 1944 and 1946, to the statutory exclusion as to each gift. The determination of this question is dependent upon whether or not the interests acquired by the donees are ‘gifts of future interests in property‘ within the meaning of section 1003(b)(3) of the Internal Revenue Code and Regulations 108, sec. 86.11.
The petitioner contends that the gift of a life interest to his wife under schedule A and the gifts of corpus to the named beneficiaries under schedules B through G, all conveyed by him in 1944, are not gifts of future interests in property, but are gifts in praesenti of present interests.
A ‘present interest‘ has been defined as the right to the present enjoyment of the corpus or of the income therefrom, and a ‘future interest‘ as any interest or estate, whether vested on contingent, limited to commence in possession or enjoyment at a future date. Ryerson v. United States, 312 U.S. 405; United States v. Pelzer, 312 U.S. 399; Regulations 108, sec. 86.11, and prior regulations. H. Rept. No. 708, 72d Cong., 1st sess., p. 29; S. Rept. No. 665, 72d Cong., 1st sess., p. 41. In determining whether the gifts herein were gifts of present or future interests, as stated in Commissioner v. Glos, 123 Fed.(2d) 548:
We are not concerned with any nice distinction between contingent and vested remainders, for Congress has included all future interests. The sole statutory distinction between present and future interests lies in the question of whether there is postponement of enjoyment of specific rights, powers or privileges which would be forthwith existent if the interest were present. This is within the recognized significance of the term ‘future interest‘. * * *
The petitioner transferred to the trustees, for the benefit of his wife, a policy of insurance of the value of $3,146.29, with the direction to pay the net income therefrom to his wife during her life, provided that, if the net income therefrom was inadequate for her proper support, maintenance, and medical care, she was to be paid from the principal of the trust estate such amount as might be necessary for her proper support, maintenance, and medical care.
It is argued by petitioner that, since the grantor knew there was no income from the property transferred to such trust, it follows that the beneficiary had only to have the needs referred to arise and she could use the corpus; and, further, since the gift was not income-producing, it would follow that the language of the trust would stand as a direction to the trustees, compelling them to borrow on or surrender the life insurance policy for cash in order to defray the wife's proper support, maintenance, and medical care. Implicit in such argument, there is a concession that the trustees were not compelled to act to apply the corpus for the support, maintenance, and medical care of the wife until necessity therefore arose.
The nature of the interest of the donee is to be determined as of the date of the gift. Commissioner v. Brandegee (CCA-1), 123 Fed.(2d) 58; Commissioner v. Gardner, 127 Fed.(2d) 929. There is no showing that on the date of the gift the necessity for the application of the corpus for the purposes designated existed. The burden of showing the existence of such necessity on the date of the gift rested upon petitioner, i.e., that the gift was not one of future interest. Commissioner v. Disston, 325 U.S. 442. The mere fact that the distribution of the corpus is postponed is enough to make the gift a gift of a future interest. Fisher v. Commissioner (CCA-9), 132 Fed.(2d) 383; Fondren v. Commissioner, 324 U.S. 18, wherein it is stated:
* * * contingency of need in the future is not identical with the fact of need presently existing. And a gift effective only for the former situation is not effective, for purposes of relief from the tax, as if the latter were specified, whether the donee is an adult or a minor.
Since the distribution of the corpus for the wife's benefit was dependent upon her need therefor, her right to the corpus was not absolute and immediate, but conditioned upon a contingency which might never arise. Her interest therein was a future interest and hence the petitioner is not entitled to the $3,000 exclusion under section 1003(b)(3).
The respondent has conceded that petitioner is entitled to the statutory exclusion of $3,000 in computing his tax liability for 1946 on account of the value of the right of petitioner's wife to receive the income from the securities transferred to the trust created in 1944 in her favor. The petitioner contends that the gift in 1946 was also a gift of a present interest as to the corpus for the life of his wife, but, as only one exclusion is allowable on any gift, he does not argue the point on brief.
What we have stated in regard to the nature of the original gift in 1944 is equally applicable with respect to the gift in 1946. The use of the corpus consisting of the securities was dependent upon the arising of the need of the wife for support, maintenance, and medical care, which need was not shown to have existed at the time of the gift in 1946. Her enjoyment of the corpus acquired by the trust in 1946 was not absolute and immediate, but dependent upon her need, which might not arise during her lifetime. Her interest in the gift of securities was therefore a future interest.
There is no question as to the gift over, upon the death of petitioner's wife, to petitioner's son and daughter. The petitioner concedes their interests are future interests.
With respect to the 1944 gifts, under schedules B and C, for the benefit of petitioner's son and daughter, respectively, the trust agreement provides for the payment quarterly of the net income and for the distribution of the corpus on December 31, 1949.
The petitioner does not contend that these beneficiaries have the right to invade the corpus as in the case of trust for his wife, but he argues that the postponement of distribution of corpus for a five-year period, as provided in the trust agreement, is within the rule of the ‘barrier of a substantial period‘ enunciated by the Supreme Court in Fondren v. Commissioner, supra, particularly since there is a provision for the payment of income quarterly during the five-year period. He further argues that the beneficiaries received a substantial economic benefit and that nothing can defeat the rights of these beneficiaries as to ownership, use, or enjoyment, as each gift is irrevocable and vested, and passes into the estates of the beneficiaries should they die before December 31, 1949, the date of distribution of corpus.
Although the trustees were directed in the trust agreement to pay the net income of these trusts quarterly to the beneficiaries until December 31, 1949, this direction was abortive and impossible of fulfillment, because the corpus was nonincome-producing property. This the petitioner knew when he made the gifts. In Commissioner v. Boeing (CCA-9), 123 Fed.(2d) 86, taxpayer irrevocably transferred to a trustee six insurance policies on his own life. Under the trust agreement the net income was payable one-half to his wife and son, the immediate beneficiaries, during their respective lives, or to the survivor thereof. The court therein stated:
* * * Clearly, the beneficiaries have no right to the present enjoyment of the policy proceeds, and they will never have that right unless they survive the trustor, or, in any event, unless they survive the possible lapse of the policies. Their use and enjoyment are ‘postponed to the happening of a future uncertain event‘ * * *
The Fondren case lays down no rule that some postponement of enjoyment is permissible, as suggested by petitioner. It specifically states: ‘The question is not when title vests, but when enjoyment begins.‘ A vested right is not enough; the donee, in addition, must have the right to use, possess, and enjoy the property presently. ‘The important thing is the certainty of postponement, not certainty of the length of its duration.‘ See Commissioner v. Disston, supra, wherein it is stated:
* * * In the absence of some indication from the face of the trust or surrounding circumstances that a steady flow of some ascertainable portion of income to the minor (or adult donee) would be required, there is no basis for a conclusion that there is a gift of anything other than for the future. * * *
The complete divestiture by the donor of all interest in the property transferred to the trusts does not constitute any of the transfers involved a gift of a present interest. The interest of the beneficiary in the trust estate or its income is controlling. Commissioner v. Gardner, supra.
The gifts under schedules B and C to the son and daughter, in our opinion, were gifts of future interests.
The foregoing is equally applicable to the gifts under schedule F and schedule G to the two grandsons, the corpus of each of which consisted of insurance policies, except that the trust under schedule F received 20 shares of stock of the value of $290, to which no reference has been made in petitioner's arguments.
As to the gifts under schedule D and schedule E to the two granddaughters, the Commissioner concedes that the petitioner is entitled to exclusions to the extent of the value of the right to receive income, or $617.52 and $955.46.
It is argued by the petitioner that the gifts to the minors are absolute in trust, that the trust agreement contains no conditions or limitations upon the gifts, and that the gifts to the minor beneficiaries can not be defeated, since the corpus will pass to their respective estates and to their heirs upon death prior to their reaching 18 years of age. While the trust agreement provides for the distribution of the income for the benefit of these minor donees, it directs the trustees to hold the corpus until the donee reaches the age of 18 years, whereupon it is to be distributed. As stated in the Fondren case, supra:
* * * Whenever provision is made for immediate application of the fund for such purpose (a minor's benefit), whether of income or of corpus, the exemption applies. * * *
Here there is provision for the immediate application of the income for the benefit of the minor donee, but there is no provision for the immediate application of the corpus, in whole or in part, for such purpose. The use and enjoyment of the corpus were postponed to some time in the future. The gifts as to the corpus under schedule D and schedule E, therefore, were gifts of future interests.
Decision will be entered under Rule 50.