Brief for the Respondents in Opposition — Howe v. United States

Lg iB Fe RN GSR ELD AN SVS PONE EN APD EO EME 2 TEMA TAR TERRES

as Taye

Page

ee eek hd oe hig tet awaw ua 1

LDR orate re adhd woes Ste a SN a ee 1

ee cali te ih aids Sram echainembednawes 2

Statute and regulation involved. _________________.________. 2

Ee Ter ates Dg ok dlrs ous hw madw'd is hnio-e'e 3

RUNNER et eet i ren SR ae SO tral ae ak cs

SPOT er ia oe Te hoe bec ane cau 11

CITATIONS

Cases:

Commissioner v. Brandegee, 123 F. 2d 58__________.____- 8,10

Commissioner v. Gardner, 127 F. 2d 929________________- 7

Commissioner v. Wells, 132 F. 2d 405__________.._______ 8

Disston v. Commissioner, decided July 12, 1944_________._ 9

Fondren v. Commissioner, No. 88, this Term_____ Care 10

French v. Commissioner, 188 F. 2d 254_____________.___. 7

pacleereny V, Bir, 42) F. 96 OND. 28s cc eek 8

Helvering v. Hutchings, 312 U. 8. 398__......__._-_____- 3

Ryerson v. United States, 312 U. S. 405____.____________. 9, 10

United States v. Pelzer, 312 U. S. 399___.__.____._______ 7

oe ws , SO Oe ok co cciwcusedcuce 7

Statute:

Revenue Act of 1932, c. 209, 47 Stat. 169:

ERMC ate ieee ee ee tk 2.7

Miscellaneous:

Treasury Regulations 79 (1936 ed.), Art 11__.__________. 2.7

(I)

611401—44

Be.

Inthe Supreme Court of the Hnited States

OcToBER T'erM, 1944

No. 433

AuicE Howe, as Execurrix or THE Estate OF

Mary E. Howe, Drcrasep, PETITIONER

Vv.

THE UNITED Srates oF AMERICA

ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED

STATES CIRCUIT COURT OF APPEALS FOR THE SEVENTH

CIRCUIT

BRIEF FOR THE UNITED STATES IN OPPOSITION

OPINIONS BELOW

The memorandum opinions of the district court

(R. 24-25, 33) are unreported. The opinion of

the circuit court of appeals (R. 54-59) is reported

in 142 F. 2d 310.

JURISDICTION

The judgment of the cireuit court of appeals

was entered on April 25, 1944 (R. 60) and a pe-

tition for rehearing was denied June 6, 1944 (R.

75). The petition for a writ of certiorari was

filed September 5, 1944. The jurisdiction of this

(1)

— i oe

2

Court is invoked under Section 240 (a) of the

Judicial Code, as amended by the Act of Febru-

ary 13, 1925.

QUESTION PRESENTED

Whether a gift in trust for the donor’s seven

children, was a gift of future interests under

Section 504 (b) of the Revenue Act of 1932, pre-

cluding allowance of an exclusion of $5,000 for

each beneficiary.

STATUTE AND REGULATION INVOLVED

Revenue Act of 1932, c. 209, 47 Stat. 169:

Sec. 504. NE GIFTs.

(a) General Definition —The term “net

gifts” means the total amount of gifts

made during the calendar year, less the de-

ductions provided in section 505.

(b) Gifts Less Than $5,000.—In the ease

of gifts (other than of future interests in

property) made to any person by the donor

during the calendar year, the first $5,000 of

such gifts to such person shall not, for the

purpose of subsection (a), be included in

the total amount of gifts made during such

year.

Treasury Regulations 79 (1936 ed.) :

Art. 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, re-

3

mainders, 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 fu-

ture date or time. The term has no refer-

ence 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 dis-

charged by payment in the future. But a

future interest or interests in such eon-

tractual obligations may be created by the

limitations contained in a trust or other

instrument of transfer employed in effect-

ing a gift. For the valuation of future in-

terests, see subdivision (7) of article 19.

STATEMENT

In 1935, Mary E. B. Howe created a trust for

the benefit of her seven children, and in 1937, she

transferred additional property to this trust which

was reported on her gift tax return at a valuation

of $33,500. No tax was shown, however, because

seven exclusions totaling $35,000 were claimed.

The Commissioner of Internal Revenue disal-

lowed six of the seven exclusions,’ and assessed a

*Since Helvering v. Hutchings, 312 U. S. 393. had not

yet been decided, the Commissioner took the view that the

trust, not the beneficiary, was the donee. But after that deci-

sion was rendered, he adopted the position that the gifts were

of future interests and that no exclusions were allowable.

However, as the statute of limitation has run as to the exclu-

sion allowed, only six are now actually involved.

bar MRE BRP) Geo

at - Oy FE 4

pte Wb «be

BAERGA EEE ILO EEE BD OOS a aS

‘ayaa ety

Mest

ae

3

)

FY

:

i

—

4

tax of $2,768.08. This sum plus interest was paid

by the donor under protest and a claim for re-

fund was filed but was rejected on May 5, 1941.

The donor died on January 24, 1942, and the peti-

tioner, as executrix, filed this suit to recover the

tax (R. 2-3, 4, 16).

The trust agreement, which is set out as Exhibit

‘““A’’ to the complaint (R. 5-11), provides that its

general purpose is (R. 5)—

to conserve the assets while present cireum-

stances render it difficult or impracticable

to distribute them and to place the assets

as rapidly as practicable in condition for

liquidation and distribution.

The trustees are given legal title to the personal

and real property transferred by the donor and

are given ‘‘the broadest possible power in the

holding, management and sale of the property”

(R. 6). But the trust powers are qualified by the

provision that before binding the trust in any

building program which will involve a total ex-

penditure of more than $3,000, the trustees are

required to give the beneficiaries ten days’ notice,

‘and; in case a majority expresses disapproval, the

trustees are not to proceed (R. 6-7).

As to the time and manner of distribution of

trust income and corpus the trust instrument

provides (R. 8-9):

9. The Trustees may, in their diseretion,

arrange on what they regard as suitable

terms for individual withdrawals of non-

a —————— AX fee kn SET EO REG E STT I CRN EO

5

liquid assets and for the charging of such

withdrawals in an equitable manner against

subsequent distribution of income and

principal.

10. The Trustees shall, from time to

time, distribute among the Beneficiaries

such accumulated income as may in their

judgment not be needed as a reserve for

taxes and other obligations.

11. The owners of the beneficial inter-

ests shall have no power of anticipation

or assignment inter vivos of any income

or prineipal to be paid to them and the

same shall be paid only to them personally

and not to any other person by reason of

any transfer or assignment of any pros-

pective right to receive the same, or by

reason of operation of law. In the event

that any one of them shall voluntarily or

involuntarily, or by operation of law be

barred from receiving the payment thereof

and applying same to his or her own uses,

same shall be payable to his or her spouse,

if any then living with him or her, and if

none, then such payment shall be applied

by the Trustees toward the eare, support

and maintenance of the owner in question

and his or her family. The provisions of

this paragraph shall be applicable to pay-

ments due to minors so that the Trustees

shall in effect act as guardians during the

minority of minor heirs of a deceased Ben-

eficiary, but in no event shall the Trustees

accumulate ineome after the date for final

closing.

ae ee |

Re CANT AE MLR US AEA TRA DTN PLR PEGI LEME BPR OTA T

6

12. Upon a majority of the Beneficiaries

or of the survivors of them joining in a

written demand that the estate be closed

and distributed, the Trustees shall comply

with said demand within one year from the

presentation thereof to the Trustees, but

in any event such closing shall not be later

than eighteen years after the death of the

Donor.

13. All distributions of liquid assets or

cash, whether income or principal, shall be

in equal shares between the Beneficiaries

except that in case of the death of a Bene-

ficiary, the share shall go to the heirs,

legatees or devisees of such Beneficiary,

The discretion of the Trustees shall econ-

trol as to the values to be assigned to var-

ious assets for the purpose of distribution.

The District Court found that the trust instru-

ment provided gifts of present rather than fu-

ture interests; that it was the intention of the

donor that the gifts should vest in the donee-

beneficiaries at onee; that the donees were certain

and the interest of each was certain; that the

purpose of the trust was to conserve the assets

and prepare them for liquidation and distribu-

tion; that the trust instrument contained no ex-

press power to accumulate; that any implication

of power to accumulate is rebutted by the liqui-

dation purpose, by the direction to distribute in-

come, and by the power of ‘a majority of the bene-

ficiaries to block large improvements and to foree

final distribution; that the trustees were to aet

ee ee ee ne re See eon

7

merely as business managers for the beneficiaries ;

and that the direction to distribute income from

time to time means at reasonable intervals (R. 34).

Accordingly, the District Court decided that the

gift tax deficiency for 1937 was erroneously and

illegally assessed against petitioner’s testatrix and

that the petitioner was entitled to recover the

sum of $2,915.58 with interest thereon at the rate

of five percent per annum from February 24,

1939 (R. 35).

The eireuit court of appeals reversed the judg-

ment of the district court and denied the petition

for rehearing (R. 60, 75).

ARGUMENT

Section 504 (b) of the Revenue Act of 1932

provides for the exclusion of the first $5,000 of

a gift to any person except as to gifts of future

interests. Such interests are defined in Article

11, Treasury Regulations 79, as including estates,

whether vested or contingent, which are limited

to commence in use, possession or enjoyment at

some future time. This definition was approved

in United States v. Pelzer, 312 U. S. 399, and it

has been interpreted to cover not only gifts which

are limited to commence at a definite future time

but also gifts qualified by, or dependent upon, the

discretionary powers of a trustee. French v.

Commissioner, 138 F. 2d 254 (C. C. A. 8th);

Welch v. Paine, 130 F. 2d 990 (C. C. A. Ist);

Commissoner Vv. Gardner, 127 F. 2d 929 (C. C. A.

TOE ET St EF PIN ASE MOTs BRONTE US WBE IEED

8

7th) ; Commissioner v. Brandegee, 123 F. 2d 58

(C. C. A. Ist). See also Commissioner v. Wells,

132 F. 2d 405 (C. C. A. 6th); and Helvering v.

Blair, 121 F. 2d 945 (C. C. A. 2d).

The court below held that the gifts here are

dependent upon the discretionary powers of the

trustees and so are gifts of future interests. Its

conclusion is amply supported by the provisions

of the trust instrument. The trustees are author-

ized to make distributions “‘from time to time”

to the beneficiaries from ‘‘such accumulated in-

come as may in their judgment not be needed as

a reserve for taxes and other obligations’ (R. 8).

What such other obligations may include is indi-

cated by the extremely broad powers given the

trustees not only to improve, manage, lease, and

subdivide the property, but also “‘to donate, to

dedicate, to mortgage, pledge or otherwise

encumber said property’? (R. 9). In regard to

any “building program,” the trustees may incur

expenditures up to $3,000, and may also spend

sums in excess of that amount unless a majority

of the beneficiaries forbid (R. 6-7). Thus, even

if the gifts of income can be treated as gifts to

any extent of present interests, there is no evi-

dence of their value, and, therefore, no exclu-

sions as to gifts of such income can be allowed.

See Commissioner v. Brandegee, 123 F. 2d 58

(C. C. A. Ist), and Helvering v. Blair, 121 F. 2d

945 (C. C. A. 2d).

The trust, although purportedly created for

liquidation, may continue for eighteen years be-

yond the death of the donor unless a majority of

the beneficiaries vote for earlier termination, and

the beneficiaries have no power to anticipate or

assign any income or principal to be paid them.

Prior to termination, the trustees may, but only in

their discretion, arrange the terms for withdraw-

als of nonliquid assets (R. 8). Obviously, such

discretionary powers make both the time of dis-

tribution and the amounts to be distributed un-

certain. Consequently the beneficiaries do not

have the immediate and absolute enjoyment which

is a prerequisite to the making of a gift of a

present interest.

There is only one trust provision permitting

distribution of the estate which is not conditioned

upon an exercise of the trustees’ discretion. Para-

graph 12 of the indenture requires that the estate

be distributed upon demand of a majority of the

beneficiaries (R. 8). As the court below held,

this majority demand is a contingency even more

speculative than that involved in Ryerson v.

United States, 312 U. 8S. 405, where a gift in

trust of half the corpus to each donee, conditioned

upon a joint request for termination of the trust,

was held a gift of a future interest.

However, the decision here is alleged to be in

conflict with Disston v. Commissioner (C. C. A.

3d), decided July 12, 1944 (C. C. H. Inheritance,

10

Estate and Gift Tax Service, par. 10, 182). In

that case, gifts of trust income to minor children

were held to be gifts of present interests. Al-

though the trustees were authorized to accumulate

such trust income to the extent that they might

decide it was not needed for the education and

support of the children, the court held that a

minor’s legal disability precluded pi from re-

ceiving the income in hand currently arid that the

arrangement followed in the trust was the proper,

if not the oniy, way to make gifts of such inter-

ests to minors. While the Government is pre-

paring to file a petition for a writ of certiorari

in the Disston case because of a conflict with

Fondren v. Commissioner, No. 88, this Térm; the

Disston reasoning is confined to gifts to minors

and hence is not applicable here. Here it does not

appear that the donees are minors, and, from all

that does appear, they are legally capable of re-

ceiving their gifts immediately. Consequently, as

the trust provisions could actually prevent enjoy-

ment of the income or corpus by the donees in this

case for more than eighteen years, the gifts fall

in the category of gifts of future interests, and

are made under terms similar to gifts which have

been so classified in other cases, particularly in

Commissioner v. Brandegee, 123 F. 2d 58 (C. ©.

A. 1st), and Ryerson v. United States, 312 U. S.

405.

11

CONCLUSION

The decision of the court below is correct and

there is no conflict of decisions . The petition for

a writ of certiorari should be denied.

Respectfully submitted.

CHARLES Fany,

Solicitor General.

SAMUEL O. CuarK, Jr.,

Assistant Attorney General.

SEWALL Key,

J. Louis MonarcH,

LovlIsE Foster,

Special Assistants to the Attorney General.

OcToBER 1944,

©. 8. GOVERNMENT PRINTING OFFICE: 1946