197 F2d 107 Stifel v. Commissioner of Internal Revenue
197 F.2d 107
COMMISSIONER OF INTERNAL REVENUE.
United States Court of Appeals, Second Circuit.
Argued April 17, 1952.
Decided May 15, 1952.
Taxpayer, a New York resident, set up in 1948 three separate irrevocable trusts for his children, aged eleven, seven and four years. The trustee in each trust was directed to apply the income from the trust to the use of the children during their lifetime and upon their death to pay it over to their executors. Articles Second, Third and Eleventh, the only ones pertinent here, provided:
"Article Second: The Trustee may at any time apply to the use of the Settlor's said daughter so much of the principal of the trust, and at such time or times, as the Trustee, in its discretion, may deem necessary or advisable to provide for her proper education, medical care, living expenses and financial obligations, after giving full consideration to her age, health, abilities or limitations, other financial resources, and economic and social station in life.
"Article Third: The Trustee, during the minority of Settlor's said daughter, may make payment of income or principal applicable to the use of the Settlor's said daughter by paying the same to her mother, guardian or other person having the care and control of such daughter (but not in any event to the Settlor) or by payment directly to said daughter, or by expending it in such other manner as the Trustee, in its discretion, believes will benefit such daughter, as if the interest of said daughter in the trust property was held by the Trustee as guardian for said daughter and as if the Trustee were making payments and distributions in that capacity for the benefit of said daughter. Any payment herein authorized shall be a full discharge to the Trustee with respect thereto. Any payment or distribution by the Trustee to any duly appointed guardian for said daughter may be made directly to such guardian, whether qualified or appointed under the laws of the State of the domicile of the Trustee or not, without resort to any court for an order authorizing or directing such payment or distribution. Said daughter shall have the right at any time to demand payment to her or for her account of any unexpended income, but subject thereto the Trustee may accumulate for the benefit of such daughter so much of the income applicable to her use as the Trustee, in its discretion, may deem advisable, and any income so accumulated shall be paid to her upon her attaining the age of twenty-one (21) years or to her estate in the event of her death before attaining such age.
"Article Eleventh: The Settlor's daughter, Karen Stifel, shall have the right (which may be exercised during her minority by her general guardian, if any, or by any special guardian appointed for such purpose by a court of competent jurisdiction, but in no event by the Settlor) at any time to terminate this trust either in whole or in part, and during minority to demand payment of all or any part of any unexpended income, in which event such part or all of the principal of the trust, or any accumulated income of the trust, as to which the trust is so terminated, or such part or all of the income so demanded, as the case may be, shall be paid over to the Settlor's said daughter, or, if she be a minor, to her general guardian or to such special guardian, but in no event to the Settlor."
Taxpayer deposited $3,500 in each trust, and treated $9,000 as tax-free under Section 1003(b)(3), excluding from tax the first $3,000 of gifts made annually by the donor to any one person, except gifts of future interests in property.1 The Commissioner ruled that the gifts were not tax-free because they were gifts of future interests, and the Tax Court upheld him. 17 T.C. 647. The taxpayer has appealed.
Robert L. Fay, Wallingford, Conn., for petitioner.
Ellis N. Slack, Washington, D. C. (I Henry Kutz, Washington, D. C., of counsel), for respondent.
Before SWAN, Chief Judge, and AUGUSTUS N. HAND and FRANK, Circuit Judges.
FRANK, Circuit Judge.
If an adult had been the beneficiary of each of these trusts, of course the gifts would not have been of future interests, since then (under Article Third) each such adult at any time could have demanded payment of income and (under Article Eleventh) of the corpus.2 But here we have the following differentiating facts: (1) None of the children could himself make such a demand; he could do so only through a guardian. (2) The donor testified as follows: He had set up the trusts for the express purpose of teaching the three children how to invest their own money; his attorney had suggested naming a guardian in the instrument, but the donor had objected, because a guardian would be limited by law in what use he could make of the income on the children's behalf, and would be unable to allow them free play in the pecuniary education the donor wanted them to have. (3) No guardian was appointed during the period of three years from the creation of the trusts to the date of the trial here, although in New York, consent of the donor, the father, would not apparently have been necessary to the appointment of a guardian.3 On these facts the Tax Court concluded, and we agree, that only future interests were conveyed at the time the trusts were set up.
It is urged that neither the Tax Court nor we may properly consider these items, since they involve restrictions not contained in the trust instrument. Cf. Kieckhefer v. Commissioner, 7 Cir., 189 F.2d 118, 122. But in Fondren v. Commissioner, 324 U.S. 18, 24, 65 S.Ct. 499, 89 L.Ed. 668, and Commissioner v. Disston, 325 U.S. 442, 449, 65 S.Ct. 1328, 89 L.Ed. 1720, the Supreme Court, in determining the nature of the rights conferred by the trust instruments, took account of "surrounding circumstances"; the Court, in reaching its determinations, did not irrevocably lock itself inside the "four corners" of the writings but held that the key might lie outside. Were this not the rule, a donor could make gifts which on paper were 100% present but in practice were 100% future.
The Court of Appeals, in the Kieckhefer case, expressed the fear that no gift to a minor would be tax-free if the child's right at once to enjoy the fruits of the gift constituted the sole test of a present interest, since (it was said) the child's guardian or parent will always exercise control of some sort over the disposition of the child's property, so that only if the child's rights were those of "a boy to his top" or a "girl to her doll" would the gift be tax-free.4 We believe this view under-estimates the traditional judicial knack of line-drawing. If here, for instance, the donor had, in the instrument, appointed a guardian to exercise the children's election rights, or indeed even if a next best friend of the children had successfully petitioned for one at the time the trust first was set up, the result might very well be different.5 Then there would have been someone who, on the children's behalf, could have made an effective demand for income or corpus on the trustees under Articles Third and Eleventh. Here, there was no one who could exercise their election rights for them; consequently they acquired only "future interests," not subject to immediate capture.
1. Internal Revenue Code:
"§ 1003. Net gifts
"(a) General definition. The term `net gifts' means the total amount of gifts made during the calendar year, less the deductions provided in section 1004.
"(b) Exclusions from gifts
* * * * * *
"(3) (As added by Sec. 454 of the Revenue Act of 1942, c. 619, 56 Stat. 798) 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." 26 U.S.C.1946 ed. § 1003.
"Treasury Regulations 108, promulgated under the Internal Revenue Code:
"Sec. 86.10. Total Amount of Gifts. Except with respect to any gift of a future interest in property, the first $3,000 of gifts made to any one donee during the calendar year 1943 or during any calendar year thereafter shall be excluded in determining the total amount of gifts for such calendar year. In the case of a gift in trust, the beneficiary of the trust is the donee of the gift. * * * The entire value of any gift of a future interest in property, and the entire value of any gift made by a transfer in trust during the calendar years 1939 to 1942, inclusive, must be included in the total amount of gifts for the calendar year in which such a gift is made.
"Sec. 86.11. Future Interests in Property. No part of the value of a gift of a future interest may be excluded in determining the total amount of gifts made during the calendar year. `Future interests' is a legal term, and 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. The term has no reference to such contractual rights as exist in a bond, note (though bearing no interest until maturity), or in a policy of life insurance, the obligations of which are to be discharged by payment in the future. But a future interest or interests in such contractual obligations may be created by the limitations contained in a trust or other instrument of transfer employed in effecting a gift. For the valuation of future interests see section 86.19(g)."
2. The trust instrument itself seems to confer the rights — to demand income (Article Third) and to terminate the trust (Article Eleventh) — on the beneficiary directly, without making the intervention of a guardian necessary even during minority. The Commissioner, however, has argued that the instrument itself, in Article Eleventh, requires that the election to terminate be made by a guardian. The Tax Court was not entirely clear in its opinion whether the necessity of a guardian stemmed from the instrument or from legal disqualifications. In any event, whether the need for a guardian was intrinsic or extrinsic here is immaterial to the outcome; taking the view more favorable to the taxpayer, we are here considering the need as extrinsic. Cf. Kieckhefer v. Commissioner, 7 Cir., 189 F. 2d 118.
3. Surrogate's Court Act, §§ 173, 175; see Matter of Stuart, 280 N.Y. 245, 249, 20 N.E.2d 741; Matter of Gustow, 220 N.Y. 373, 115 N.E. 995. No one of the children here was over 14, however, and therefore none could himself petition for a guardian's appointment. See Spyrous Skouras, 14 T.C. 523. Surrogate's Court Act, § 175.
4. See Note, 37 A.B.A.J. 78; cf. Fleming, Gifts For the Benefit of Minors, 49 Mich.L.Rev. 529; Note, 100 Un. of Pa. L.Rev. 905.
5. It would then seem to be proper to consider the actual facts as to the father's influence on the guardian appointed.