Hay v. Commissioner , 47 B.T.A. 247 ( 1942 )

ALMA S. HAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hay v. Commissioner

Docket No. 107481.

United States Board of Tax Appeals

47 B.T.A. 247; 1942 BTA LEXIS 717;

June 30, 1942, Promulgated

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">*717 Gifts in trust for an indeterminate period during which neither principal nor income was distributable to beneficiaries except in trustees' discretion, held, future interests and not subject to $5,000 exclusions, regardless of beneficiaries' possible right under the terms of the trust of immediate disposition of their interests.

Herman T. Van Mell, Esq., for the petitioner.

David Altman, Esq., and George E. Gibson, Esq., for the respondent.

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OPPER

">*247 By this proceeding gift taxes in the amount of $3,030.08 for the year 1937 are contested.

The sole issue is whether certain gifts in trust were gifts of future interests, for which no exclusions are granted by Revenue Act of 1932, section 504(b).

FINDINGS OF FACT.

Petitioner is an individual, residing in Chicago, Illinois. Her gift tax return for the year 1937 was filed with the collector of internal revenue for the first district of Illinois.

On December 22, 1937, petitioner executed an irrevocable trust and conveyed to the trustees thereof certain parcels of real estate situated in the State of Illinois of a total value of $51,100.

Petitioner had three sisters, each of">*718 whom had three children. Petitioner named as trustees in the above mentioned trust instrument a son of each of her sisters.

The trust instrument provided that the trust estate was to be immediately divided into nine equal separate shares, one for the benefit of each of the children of petitioner's sisters.

Paragraphs third and fourth of the trust agreement provided as follows:

The Trustees shall hold, manage, invest and administer the trust or trust estate for a period of twenty years from the date hereof, unless prior to that time all of the real estate constituting the same shall have been sold, disposed of or reduced to personalty and in such form so that they in the exercise of their ">*248 sound judgment and discretion consider it practical and convenient to distribute the same; in which event they may distribute the same at any such time and this trust shall thereby be terminated.

The Trustees may in their discretion during the term of the trust or trust estate pay the entire net income of any separate share or any part thereof to the beneficiaries herein named, or may allow said entire net income of said share to accumulate during the term of the trust.

">*719 By the fifth paragraph of the agreement it was stated that upon the termination of the trust, as provided in the instrument, the trust estate was to be distributed in equal shares to the nine beneficiaries.

Paragraph sixth provided for the distribution of the beneficiaries' shares in the trust estate '(In the event of the death of any of the * * * beneficiaries before the termination of the Trust and distribution of the trust estate" as provided in the trust instrument. The shares of Henry Bartholomay and Ernst C. Schmidt were to be distributed as they directed by will or in default of such direction in their heirs at law and next of kin "determined at that time and in accordance with the laws of the State of Illinois as then in force." The shares of Albert F. Madlener, Jr., Alma S. Peterson, Theresa S. Reese, Catharine Bartholomay Osborne and Elsa Bartholomay Chapin were to be distributed as they directed by will or in default of such direction to their then living lawful descendants, per stirpes, and if there were no such descendants, then to their heirs at law and next of kin, "determined at that time and in accordance with the laws of the State of Illinois as then in force. ">*720 " The share of William C. Madlener was to be distributed in equal parts to Otto Madlener and Albert F. Madlener, Jr., or the survivor of them, and in the event of the death of both of them then to the heirs and next of kin of William C. Madlener, "determined at that time and in accordance with the laws of the State of Illinois as then in force and effect." The share of Otto Madlener was to go in equal parts to William C. Madlener and Albert F. Madlener, Jr., or the survivor of them, and in the event of the death of both of them, to the heirs at law and next of kin of Otto Madlener "determined at that time and in accordance with the laws of the State of Illinois as then in force and effect."

Paragraph seventh of the agreement provided as follows:

Any of the beneficiaries named in Paragraph Fifth hereof may at any time prior to his or her death and during the term or period of the trust, by appropriate instrument in writing directed to the Tustees, order and direct distribution of his or her share of the trust estate to persons other than as provided in Paragraph Sixth hereof; Provided, however, that nothing herein contained shall be considered or construed as a right or power to">*721 terminate or direct a termination of the trust or his or her interest therein; and, provided further, that in no event shall any direction be made for the distribution of the share of such beneficiary so that any portion of the trust estate at any time shall revert or be distributed to the Donor.

">*249 All of the foregoing provisions for the distribution of the income and principal of the trust were "supplemented by and when necessary * * * subject to" provisions set forth in paragraph eighth. By the terms of this paragraph the trustees at any time, when in their judgment it was necessary, could pay all or any portion of the principal of the share of any beneficiary for his or her proper care, support, medical attention, education and maintenance; or to enable any beneficiaries to provide such services for their children. Payment could also be made of all or any portion of the principal and interest in the discretion of the trustees in order to enable any beneficiary "to take any action of a worthy, commendable character or nature approved by a majority of the Trustees."

By paragraph eighth (b5) it was provided that the trustees "may also in their uncontrolled discretion">*722 at any time during the term of the trust pay over and deliver to any beneficiary the whole or any part or portion of the principal and interest of the trust estate then held for the benefit of such beneficiary."

Special provisions appear in the trust for the payment to or on account of beneficiaries who were minors.

By paragraph eighth (b8) it was provided:

Any income payments provided for herein shall only be made when and as such income after it shall have accrued, shall be in the possession of the Trustees for payment, and no disposition, charge or encumbrance of any such income or of the principal of the trust estate or any part thereof by any beneficiary hereunder by way of anticipation shall be of any validity or legal effect, or be in any wise regarded by the Trustees; and no such income or principal or any part thereof shall in any wise be liable to any claim of any creditor of any such beneficiary.

By paragraph eighth (b9) it was provided:

Upon the death of any beneficiary, any accrued, accumulated or unpaid net income which would have been payable to such beneficiary had such beneficiary lived, shall be added to, considered as income and shall be paid to the next">*723 beneficiary or beneficiaries succeeding in interest.

By paragraph eighth (b10) it was provided:

The Trustees must receive actual notice of the valid exercise of any power of appointment, and if such power is exercised by will, then within six months after the death of the Donee of the power, otherwise a default in such appointment shall be deemed to have occurred.

In paragraph eight it was also provided that the trustees in their discretion could terminate at any time any trust which was then of the aggregate principal amount of $1,000 or less.

By paragraph eighth (b12) it was provided:

Upon the termination of any trust or part thereof, pursuance [sic ] to the provisions hereof, the Trustees shall pay and distribute such trust or part to the then beneficiary thereof. If there be more than one beneficiary, then such distribution shall be made to such beneficiaries in the proportion in which they are to receive the same.

">*250 The trustees were given broad powers with respect to the trust property and income, including the conclusive determination of what should be "income" and what should be "principal." They were given the power to improve and mortgage">*724 any of the trust real estate and use principal or net income of the trust estate for the maintenance and improvement of any of the real estate.

By paragraph eleventh it was provided that the decision of a majority of the trustees was to be final and binding upon all of the trustees.

In her gift tax return petitioner claimed nine exclusions of $5,000 each for the gifts effected by the creation of the trust. Respondent disallowed the exclusions, stating in his notice of deficiency as follows:

Under the provisions of the trust agreement, the trustees may pay the income from the property transferred to the beneficiaries or may allow the entire net income to accumulate during the term of the trust. As the doness have no right to the immediate use, possession or enjoyment of the income or corpus of the trust, it is held that the gifts are gifts of future interests against which no exclusions are allowable.

OPINION.

OPPER: There are several grounds upon which respondent's determination that these gifts were of future interests might be upheld. Paragraph sixth of the trust instrument dealing with the devolution of the shares of the primary beneficiaries upon their death makes">*725 it impossible to determine presently who will be the ultimate takers. See . The trustees' power to accumulate income and hold the corpus for an indeterminate period renders impractical any appraisal of the present value of the interests acquired by the individual grantees. See ; . But what we think a sufficiently final consideration is that even the existence of a present right to dispose of what is concededly a future interest, the only ground upon which petitioner seeks to distinguish the cases apparently fatal to her contention, ¹ can not in our view transform a future estate into a present one for purposes of section 504(b) of the Revenue Act of 1932.

In the absence of an express permission such as is the effect here, in petitioner's view, of paragraph seventh of the">*726 trust instrument, ² we ">*251 know of no rule preventing the assignment of a future estate if the grant is silent on the subject. We can not assume that the affirmative insertion of an authorization which in any event the law would imply can raise the situation to a higher dignity. See . Hence we are presented with the simple question whether a deed of gift conveying a future estate, such as a remainder, deals with a present interest merely because there is no prohibition of anticipatory alienation.

It seems evident that, since "future interests" unquestionably include even vested remainders, ">*727 ³ a form of property which is readily transferable, the mere power to realize some present benefit by an immediate disposition of a beneficiary's interest will not suffice to convert an enjoyment which the donor has cast into the form of a postponed expectancy into a true present interest. The mere power of present disposition can not be the test, or at least such estates as vested remainders would be present 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." .

We may assume that the donee could sell his gift or give it to another. The recipient might then be in the donee's shoes. But he would be no more than the present">*728 owner of a future right. The interest given would still remain an expectancy with the use, possession, or enjoyment delayed. The gift is what the donor gave. That continues to be a future interest if that was the character fastened upon it by the donor. The exclusions from the gift must have their source in that character. What the donor gave these beneficiaries was consequently nothing but a group of future interests from which the statutory exclusions are accordingly expressly withheld. That being our view, we find it unnecessary to attempt the difficult feat of construction involved in ascertaining the meaning of paragraph seventh in the light of the conflicting provisions of paragraphs sixth and eighth (b8).

Decision will be entered for respondent.

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Footnotes

• 1. E.g., ; ; ; . ↩

• 2. "Any of the beneficiaries named in Paragraph Fifth hereof may at any time prior to his or her death and during the term or period of the trust, by appropriate instrument in writing directed to the Trustees, order and direct distribution of his or her share of the trust estate to persons other than as provided in Paragraph Sixth hereof; Provided, however, that nothing herein contained shall be considered or construed as a right or power to terminate or direct a termination of the trust or his or her interest therein; * * *" ↩

• 3. "As the court said in : '* * * it cannot be doubted that a vested and indefeasible legal remainder after a life estate is a "future interest."'" [↩