Nelson v. Commissioner , 46 B.T.A. 653 ( 1942 )

MARY R. NELSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

C. P. NELSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Nelson v. Commissioner

Docket Nos. 108052, 108053.

United States Board of Tax Appeals

46 B.T.A. 653; 1942 BTA LEXIS 843;

March 13, 1942, Promulgated

---

1. Taxpayers created a trust for the benefit of their four adult children and pursuant thereto conveyed to the trustees certain real property, some of which was then under mortgages. The trustees were empowered "To pay and curtail any indebtedness upon the property as and when the same becomes due and payable. The income from the property may be used to pay off and satisfy any indebtedness upon the property, * * * with the charge to the Trustees that any indebtedness shall be liquidated as soon as reasonably possible." Held, that the interests of the four children were future interests and that no $5,000 exclusions were allowable. Commissioner v. Brandegee, 123 Fed.(2d) 58, followed.

2. In the trust indenture the trustees were empowered in their discretion, in an emergency, to advance and use for the benefit of any beneficiary of the trust the income or corpus of the trust and charge such sums so advanced to the beneficiary receiving same, to be taken into account in the final distribution of the trust. Held, such powers did not convert what otherwise were future interests into present interests in property. Welch v. Paine, 120 Fed.(2d) 141, followed.

Taylor Vinson, Esq., for the petitioners.

E. L. Corbin, Esq., for the respondent.

---

BLACK

These proceedings have been consolidated.

The taxes in controversy are gift taxes for the calendar year 1938 in the amount of $1,683.57 for Mary R. Nelson and $1,006.42 for C. P. Nelson, the total sum in controversy being $2,689.99.

The errors which the petitioners have assigned are:

(1) The failure of the Commissioner to allow as exclusions $20,000.00 to each petitioner, representing exclusions of $5,000.00 each to four beneficiaries or donees.

(2) The determination of the Commissioner that the gifts made by petitioners were gifts of a future interest and not gifts of a present interest.

FINDINGS OF FACT.

Petitioners are husband and wife and reside at Huntington, West Virginia. They each for the calendar year 1938 filed a gift tax return with the collector of internal revenue for the district of West Virginia.

In the calendar year 1938 Mary R. Nelson, one of the petitioners, established a trust for the use and benefit of her four children, and gave to the trustees total gifts of $102,237.71, after the deduction of certain mortgage indebtedness against some of the property. She took as exclusions $20,000 representing $5,000 for each of the four beneficiaries or donees, and her specific exemption of $40,000, making the net gift $42,237.71, upon which she paid a tax of $1,667.82.

In the same year C. P. Nelson, the other petitioner herein and husband of Mary R. Nelson, joined in the same trust agreement with his wife and gave to the trustees total gifts of $78,547.20, after the deduction of certain mortgage indebtedness against some of the property. He took as exclusions $20,000, representing $5,000 for each of the four beneficiaries or donees, and his specific exemption of $40,000, making the net gift $18,547.20, upon which he paid a tax of $406.41.

The trust which petitioners established was created on December 20, 1938, and was for the use, benefit, and enjoyment of their children, Betty Jane N. Vinson, Edwin Robson Nelson, Mary Elizabeth Nelson, and James Houghton Nelson, and for the purpose of ultimately providing and assuring them an independent income. Certain real estate situate in Cabell County, West Virginia, was, by the agreement and subsequent deed of the same date, transferred to the two trustees of the trust, namely, Richard Henry Williams and James Houghton Nelson.

The real estate consisted of farm property, city property (Huntington), improved property, unimproved property, and vacant lots. Some 20 to 30 tracts were conveyed. Some of the tracts were encumbered by mortgages and others were free and clear of any encumbrances. The gifts consisted solely of real property.

The trustees were Richard Henry Williams, a trusted and qualified real estate man who had been associated with C. P. Nelson since 1914 and was familiar with the properties, and James Houghton Nelson, a son of the petitioners and one of the beneficiaries or donees.

All four of the beneficiaries or donees were over twenty-one years of age when the gift was made in 1938.

There was no net income of the trust for the years 1939 and 1940.

An advancement was made to one of the beneficiaries, James Houghton Nelson, by the trustees when in the trustees' opinion an emergency arose in his case in 1941. The amount of this advancement was not disclosed by the evidence. The other beneficiaries were consulted, as well as the counsel for the trustees, and their approval was obtained before the advancement was made. This was not a loan made to James Houghton Nelson, but an advancement to be deducted from one-fourth share in the trust estate in the final settlement.

The trust indenture dated December 28, 1938, is incorporated in these findings of fact by reference. The following provisions thereof are deemed pertinent to the issue involved in these proceedings and are copied herein as they appear in the instrument itself:

(4) The said Trustees are hereby authorized and empowered to exercise all or any of the following powers and authorities as if they were the absolute owner of the property and the Donors declare that the trustees may exercise any or all of said powers and authorities from time to time as in their absolute discretion they may see fit for the use and benefit of the said Beneficiaries, Betty Jane N. Vinson, Edwin R. Nelson, Mary Elizabeth Nelson and James Houghton Nelson;

(a) To invest or reinvest the trust property, including any surplus of income therefrom, any additions thereto and accretions and accumulations thereof, as well as any other property of any kind whatsoever that may be delivered, conveyed or transferred to, or come into the hands of the Trustees.

(b) To sell, transfer and convey at public or private sale, any part or all of the trust property; to lease or release the same, or any part thereof upon such terms and for such period or periods as the Trustees may see fit.

* * *

(1) To pay and curtail any indebtedness upon the property as and when the same becomes due and payable. The income from the property may be used to pay off and satisfy any indebtedness upon the property, including any loans or advancements upon any insurance policies, with the charge to the Trustees that any indebtedness shall be liquidated as soon as reasonably possible.

The Trustees may use the proceeds from any sale, concession or loan to apply upon any indebtedness. The principal or corpus of the trust may be used in such payment or satisfaction of any indebtedness.

* * *

(8) The Trustees are empowered in their discretion, in an emergency, to advance and use for the benefit of any of the beneficiaries hereunder the income or corpus of the trust and charge such sums so advanced to the beneficiary receiving same to be taken account of in the final distribution of the trust.

The Trustees shall determine in their best judgment when such emergency arises.

(9) After all indebtedness is paid and satisfied, or, though not all paid if in the opinion of the trustees it would not entail a burden on the trust, they may pay to the beneficiaries share and share alike, any sum or sums from the surplus income account.

(10) The Trustees may pay to the beneficiaries share and share alike the net income from the trust in quarterly installments as soon as all indebtedness of the trust is paid and satisfied.

(11) The term of this trust shall be for the period of ten years from date hereof.

If at the expiration of the ten year term, a majority of the beneficiaries agree in writing so to do, the trust shall be extended for an additional ten years upon the same terms and conditions. During the period of the second ten year term a majority of the beneficiaries, may upon written agreement, alter, modify or terminate the trust at any time thereunder.

(12) The beneficiaries herein are the children of the Donors and they, Betty Jane N. Vinson, Edwin Robson Nelson, Mary Elizabeth Nelson and James Houghton Nelson, shall have equal interests in the trust, share and share alike, subject however to the provision of Paragraph #16 hereinafter set forth.

In the event of the death of one or more of the beneficiaries during the term of the trust or any extensions thereof, the child or children of said beneficiary shall inherit and become vested with the interest of their deceased parent in and to the trust. In the event any beneficiary dieing [sic] intestate, without issue or surviving spouse, the interest of said beneficiary herein shall vest in and pass to the surviving beneficiary or beneficiaries.

(13) The Donors reserve no beneficial right or interest of any kind in or to the trust property or to any of the income therefrom.

* * *

(16) During the term of this trust neither the principal nor the income of the trust shall be liable for the debts of any beneficiary, and no beneficiary shall have any power to sell, assign, transfer, encumber, alienate or in any other manner anticipate or dispose of any share or portion of said principal or income.

In the event any beneficiary shall be guilty of violating the above provisions, the trustees, may in their discretion take or withhold the interest of said beneficiary in the trust and the Trustees may assign absolutely said interest to the remaining beneficiary or beneficiaries, who have not been guilty of such acts.

OPINION.

BLACK: Were the interests conveyed by petitioners in trust for their four children future interests in property as the Commissioner has determined, or were they gifts of present interests as the petitioners contend? The answer to that question presents the only issue that we have to decide. There is no dispute by the parties as to the value of the property which was the subject of the gifts.

The meaning of the term "future interests" as used in section 504(b) of the Revenue Act of 1932 is discussed at some length in , and in , and we shall make no attempt to repeat that discussion here. We refer to it for a better understanding of our opinion which follows:

The trust indenture which was involved in the case of , contained certain features similar to the trust instrument involved in the instant case. Paragraph 4 of the trust instrument involved in the Brandegee case provided in part:

* * * And after all mortgages and other charges or obligations against property acquired by the trustees by gift or purchase, including mortgages and other charges or obligations given in substitution therefor, are paid in full (as to which facts the decisions of the trustees shall be conclusive) the trustees shall, during the continuance of the trust, pay the net income from the trust property as aforesaid. Payments of income shall be made quarterly and there shall be no apportionment of income on the death of any person entitled thereto.

In the instant case paragraph (4)(1) of the trust indenture, copied in our findings of fact, confers upon the trustees similar powers and duties.

Also paragraph (9) of the trust indenture provides as follows:

(9) After all indebtedness is paid and satisfied, or, though not all paid if in the opinion of the trustees it would not entail a burden on the trust, they may pay to the beneficiaries share and share alike, any sum or sums from the surplus income account.

It is clear that the provisions of the trust indenture in the instant case in the respects noted above are as broad and comprehensive as they were in theBrandegee case, supra. The court in the Brandegee case, in discussing these powers conferred upon the trustees, among other things, said:

* * * Under the power conferred upon the trustees in the case at bar, they could apply all the income, or indeed all or any part of the principal, of the 1937 gift toward the extinguishment of existing charges against the property; thus they are in effect authorized to accumulate the income until the net value of the trust property is augmented by an amount equal to that of such outstanding encumbrances. It is true that the trustees have a discretion to pay the net income to the beneficiaries in equal shares; and the right of the beneficiaries to receive such income at any time the trustees should choose to give it to them is no doubt a kind of interest of which a court of equity may take congizance. See (C.C.A. 1st, 1940). But if it may be called a present interest there is still the difficulty that such an interest is inherently incapable of valuation. (C.C.A.2d, 1941). Where the absolute right of the beneficiaries to enjoyment of the income is postponed until the happening of a future event, a $5,000 exclusion in respect of each donee is not allowable to the donor under § 504(b) merely because he has invested the trustee with an immediate discretionary power to make advancements. ;;And this is so whether or not the trustee happens to pay over income to the beneficiaries during the year in which the gift is made. The nature of the interest of the donees is determined as of the date of the gift, not by what the trustee may subsequently choose to do in the exercise of his discretionary power. See .

The court there held that the interests granted to the beneficiaries were future interests, if there were existing mortgages at the time of the gift which had to be paid off by the trustees and which would postpone the unqualified right of the beneficiaries to enjoyment of the net income. In the instant case it is clear that there were mortgages against the properties of petitioners which the trustees were charged with paying off as one of their primary duties. See paragraph (4)(1) of the trust indenture. Under these circumstances we think Commissioner v. Brandegee is applicable and supports the Commissioner's determination.

Petitioners in their brief lay considerable stress as one of the facts showing that the gifts were of present interests rather than of future interests, that the trustees in an emergency could make an advancement to any one of the beneficiaries out of his or her portion of the trust estate, and that this was actually done in June 1941 in the case of James Houghton Nelson.

In , where the court held that the gifts were of future interests, the court in its opinion called attention to the following facts, among others, as existing in that case: "The trustee was empowered to advance to the beneficiaries, or for their benefit, such sums out of their respective shares as he might in his absolute discretion deem necessary or advisable for their support, maintenance or education. " We can see no essential difference between the power of the trustees to make advancements to the beneficiaries in the instant case and that which was present in Welch v. Paine.

We hold that the gifts in question were gifts of future interests and that petitioners are not entitled to any $5,000 exclusions by reason thereof. .

Decision will be entered for the respondent.