Brief for the Petitioner — Fondren v. Commissioner

Supreme Court brief1945

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IN THE

SUPKEME COURT/OF: THE

| UNITED STATES

OCTOBER TERM, 1944

No. 88

bria F, FONDREN AND THE Estate or W. W. Fonpren,

Deceasep, E1ta F. FoNpReN, INDEPENDENT Exec UTRIX,

Petitioners,

COMMISSIONER OF INTERNAL REVENUF,

Respondent

-_——

On Certiorari to the United States Circuit Court of

Appeals for the Fifth Circuit

BRIEF OF PETITIONERS

E. E. Townes,

W. M. Cleaves,

Attorneys for Petitioners

ALPS LAW BBIEF CO. HOUSTON

SUBJECT INDEX

Na I URE OF CASE . . . . . . . ° ° ° .

guesvomy. OF GAse TO BPATE . 6 6 otk

OPrnciIAL REPORTS OF OPINIONS IN LOWER CourRTS

JURISDICTION OF SUPREME CouRT oF THE UNITED

eras, GTi ec at eg ey Ag

fe en ee

measoms for Jurmacuon . . 1. ke

CONCISE STATEMENT OF CASE .......

Semen @E Pemtnonets 2 ok kk ke

DPMS ar ee ee kg

Identity of Beneficiaries ..

Controlling Provisions of Trusts)...

Substantial Simecrity of Trusts . . 2. .

ee a ee ee

RCM OREO « 2 «5s Ys oa: Se

Eucermt thee Aeeeeeals 8 sw s

PSCerne re eeMG gs a ge eas

Excerpt from Cloing Paragraph . . . . tt.

Pugeree toms Hee Vie ea

Birthdays of Beneficiaries .. AOS Sarge ae

Nature and Value of Respective Gifts Ace

iila F. iondren Successor yO Se ae olgee

All Grandchildren Beneitciaries Still Living.

All Grandchildren Beneficiaries Adequately bap:

ported by Parents . . . :

All Gifts Reported and Annual E eelusons C Sonica

Reasonable Annual Costs of Support, Maintenance

and Education of Each Beneficiary . . ..

Elfa F. Fondren Ovalitied as Indeperdent Executrix

fW. W. Fondren, Deceased . . . ..

PAGE

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coowewo WO KEOANA AH

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SPECIFICATION OF ERRors . . . . . Pie Ste

First Assignment of Error... ena hee

Second Assignment of Error’: . . . . ar

SUMMARY: OF ARGUMENT . .. ae e s DAIS

Each Gift Is to Specifically Named Grandchild . .

Each Gift Immediately Available to Grandchild .

Right of Grandchild Not Subject to Any Discretion

Right of Grandchild Not Dependent Upon Survivor-

ship Goce PEs RAL SUL Femi wut bine citrine,

Neither Use, Possession or Enjoyment Limited to

Commence in the Future... ha

Beneficiary Vested With Use, Possession and Enjoy-

ment of Gift to Extent of His Full Capacity to

Use, Possess and os OT age gt ae oie ee

Gifts Not Future Interest Gifts Within the Méaning

ot:

United States v, Pelzer . . SEES 2 Ns 7 et ame

Ryerson v, United States

Fisher ov. Commissioner

Commissioner v. Wells

Sensenbrenner v. Commissioner

Commissioner v. Phillips’ Estate... o.

vr. a ;

Gifts Are Gifts of Present Interests . .

ARGUMENT . . |. ., ef nha pare er kee

Subdivision A—Concerning Exclusion Provisions of

Revenue Act and Regulations

History of Exemption Provisions

Applicable Provisions if the Revenue Act

Applicable Provisions of Regulation 79

Subdivision B—Fact Situation When Gifts Were

Made ‘ ; ° r 7 " . : ® ° e

Subdivision C—Discussion . Pare

Of Cases Cited by The Tax Court

Of Cases Cited by the Circuit Court of Appeals

for the Fifth Circuit . . . ;

Of Cther Pertinent Cases :

Ot Trusts Involved in Instant Case

CONCLUSION

FRAN A ES OG ee ae

TABLE OF CASES

Commissioner y. Phillips’ Estate, 126 Fed. (2d) 851

Commissioner vy. Taylor, 122 Fed. (2d) 714

Commissioner v. Wells, 132 Fed. (2d) 405

Disston v. Commissioner, 144 Fed. (2d) 115

Fisher v. Commissioner, 132 Fed. (2d) 383

Kinney v. Anglim, 43 Fed. Sup. 431

Mary M. Hutchings, 1 T.C. 692

Paul v. Commissioner, 46 B.T.A, 920

l_yerson v. United States, 312 U.S. 405

Sensenbrenner v. Commissioner, 134 Fed. (2d) 883

Pat ee FP

Smith v. Commissioner, 131 Fed. (2d) 254

United States v. Pelzer, 312 U.S. 399

Welch v. Paine, 130 Fed. (2d) 990

Winterbotham v. Commissioner, 46 B.T.A. 972

14, 25,

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IN THE

SUPREME COURT OF THE

UNITED STATES

OCTOBER TERM, 1944

No. 88

ELLa F, FONDREN AND THE Estate oF W. W. FONDREN,

Deceasep, Etta F. FonprReEN, INDEPENDENT EXECUTRIX,

Petitioners,

V. j

COMMISSIONER OF INTERNAL REVENUE,

Respondent

On Certiorari to the United States Circuit Court sf

Appeals for the Fifth Circuit’

BRIEF OF PETITIONERS

Nature of the Case

This cause involves United States gift tax deficiencies

alleged by Respondent to be owing by W. W. Fondren and

wife, Ella F. Fondren, for the calendar year 1937,

The question involved is whether or not the several gifts

made in trust by W. W. Fondren and Ella F. Fondren re-

spectively on December 2, 1937, to seven separate trusts,

each of which trusts named one of the grantors’ grandchild-

ren as bene‘iciary, constituted gifts of future interests to the

particular grandchild within the meaning of Subdivision (b)

of Section 504 of the Revenue Act of 1932 as effective at the

time said gifts were made.

Brief History of Case to Date

This case is a consolidated case and involves the validity of

certain gift tax deficiency assessments originally complained

of by Petitioners in two cases hled in The Tax Court of the

United States. One of said two cases was numbered 107,-

473 on the docket of said The Tax Court of the United

States and was styled Ella F. Fondren, Petitioner, v. Com-

missioner of Internal Revenue, Respondent. The other of

said two gases was numbered 107,474 oa the docket of said

court and was styled Estate of W. W. Fondren, Deceased,

Ella F. Fondren, Independent Executrix, Petitioner, vy.

Commissioner of Internal Revenue, Respondent.

The two cases next above reterred to were upon hearing

by The Tax Court of the United States consolidated for de-

cision purposes, and upon decision by said court the con-

solidated case was duly appealed to The United States Circuit

Court of Appeals, Fifth Circuit.

References to Official Reports of Opinions Delivered -

in the Courts Below ~* |

The opinion of The Tax Court of the United States. (R.

28-36) is reported at 1. TC. 1036.

The opinion of the United States Circuit Court of Ap-

peals (R. 71-78) is reported at 141 EF. (2d)) 419, ia

Jurisdiction of the Court

The jurisdiction of the Supreme Court of the United

States is invoked under Section 240(a) of the Jupiciar

Copr as amended by the Act of February 13, 1925,

3 ay

Petitioner invokes the jurisdiction of the Supreme Court

of the United States under said Section 240(a) for the fol-

lowing reasons:

First—The decision of the United States Circuit Court of

Appeals for the Fiith Circuit, in holding the gifts now

under consideration to be gifts of future interests,

cites the decisions of this Honorable Court in the cases

of Unirep States v. Pevczer, 312 U.S. 399, and

RYERSON v. UNITED States, 312 U.S. 405, and stems

either from a misunderstanding of the effect of such

decisions or from an unwarranted extension of the

legal principles announced therein.

5SicOND—The decision of the United States Circuit Court

of Appeals for the Fifth Circuit, in holding the gifts

under consideration to be gifts of future interests, is

in conflict with the following decisions:

(a) The decision of the United States Circuit

Court of Appeals for the Eighth Circuit in the case

of SMITH v. COMMISSIONER, 131 Fed. (2d) 254.

(b) The decision of the United States Circuit |

Court of Appeals for the Seventh Circuit in the -

case of SENSENBRENNER V. COMMISSIONER, 134

Fed..(2d) 883.

*United States for the Northern District of Cali-

fornia, Southern Division, in the case of KINNEY

eth 5. ANGLIM, 43 Fed. Supp. 431.

(d) The decision of the United States Circuit

Court of Appeals tor the Third Circuit in the case

of Disston v. COMMISSIONER, 144 Fed. (2d) 115.

Trrpo—The ave-tion of whether or not: gifts such as thoce

now under consideration are gifts of future interests

. °

will most certainly be presented in numerous cases,

and therefore the promulgation by this Court of the

sound principle of decision will obviate much un-

necessary and prolonged litigation.

FourtH—The decision of the United States Circuit Court

ot Appeals for the Fifth Circuit, in holding the gifts

under consideration to be gifts of future interests, is

intrinsically wrong and unless corrected by this Court

will operate to multiply and prolong litigation until

the correct rule of decision is announced by this

Court.

Concise Statement of Case

From Jong prior to March 20, 1930. and continuously

until January §, 1939, the date of the death of W. W. Fon-

dren, the said W. W. Fondren and wife, Ella F. Fondren,

lived together as husband and wife and during all of said

time maintained their residence and domicile within the

State of Texas (R. 43),

Under dates December 17, 1935. December 7, 1936, and

December 2, 1937, by formal written instruments duly exe-

cuted by said W. W. Fondren and Ella P. Fondren before

W. O. Manning, Notary Public in and for Harris ¢ ounty,

Texas, the said W. W. Fondren and wife, Ella F. Fondren,

made, established, published and declared seven (7) certain

trusts, and by the terms of each of said formal written Instru-

ments constituted the said W. W. Fondren trustee to admin-

ister the trusts, with the further provision that upon the

death or resignation of said W .W. Fondren the said Ella FP,

Fondren should succeed to the trusteeship, and with further

provisions providing for the appointment of Successor trus

tees, all as in said written instruments expressly Provided

(R. 43-44),

re +.

)

Of the said seven (7) certain written instruments next

above referred to:

One established a trust for Ellanor Anne Fondren, the

daughter of Walter W. Fondren, Jr., and successor bene-

heiaries as therein provided;

One established a trust for Mary Doris Fondren, the

daughter of Walter W. Fondren, Jr., and successor bene-

ficiaries as therein provided;

One established a trust for Peter Fondren Underwood,

the son of Catherine Fondren Underwood, and succes-

sor beneficiaries as therein provided;

One established a trust for Wash Bryan Trammell, a.

the son of Sue Fondren Trammell, and successor bene-

ficiaries as therein provided;

One established a trust for Sue Trammell, the daughter

of Sue Fondren Trammell, and successor beneficiaries as

therein provided;

One established a trust for David Milton Underwood,

the son of Catherine Fondren Underwood. and succes-

sor beneficiaries as therein provided;

One established a trust for Walter William Fondren,

If, the son of Walter W. Fondren, Jr., and successor

beneficiaries as therein provided (R. 43).

or all purposes of this cause, all seven (7) of said trust

instruments are of substantially the same terms and provi-

‘ions as are contained in Prrinioner’s Expunir 1-D (R. $1-

64), saving and excepting only that the names and genders of

the primary beneficiaries of said trusts vary in order to

creaie a different trust for each of the seven primary bene-

ficiaries (Stipulation in connection with Peution for Review,

R. 65-66).

The following paragraphs constitute the pertinent pro-

visions of the Trusr INpeNtURE dated December 17, 1935.

and namin: Wash Bryan Trammell, Jr., and his successors as

beneficiaries, and which trust indenture constitutes Exhibit

1-D as offered in evidence at the bearing of this cause (R.

51-63).

(a) The opening lines read as follows:

“KNow Att MeN By Trieste Presents: that we, W.

W’. Fondren and his wife, Ella F. Fondren, of the State

of Texas and County of Harris, and hereinafter referred

to as Grantors, do hereby make, estabiish, publish, and

declare a trust and gift for our Grandson, Wash Bryan

Trammell, Jr., the son of our daughter Sue Fondren

Trammell, upon the terms, conditions and with the lim-

itations hereimafter set forth, and for the purposes and

objects herein expressed; and in consideration thereof,

and in consideration of the love and affection which we

bear to our said Grandson, we have granted, assigned,

transferred, set apart and conveyed, and by these pres-

ents do grant, assign, transfer. set apart and deliver, to

W. W. Fondren, as Trustee, and only in his capacity as

Trustee, and to his successor and successors as such Trus-

tee, all of the property described in ‘Exhibit A’ which

is hereto attached” (R. 51).

(b) The first four paragraphs of Articke Lhree deal with

the designation of beneticiaries and read as follows:

“Out of the trust estate hereby created and as the same

may hereafter be augmented and macreased by gift trom

the Grantors or either of them as herein provided for,

or tvom any other source whatsoever, the Trustee shall

provide for the support, maintenance and education of

our said Grandson, using only the income of said estate

tor that purpose if it be sufficient. If it be necessary to

use any of the corpus of the estate for that purpose and

in the judement ot the Trustee it is best to do sO, said

Trustee may make advancements out of the corpus of

said trust estate for such purpose for the benefit of our

suid Grandson,

“It is contemplated, however, that our said Grandson

will have other adequate and sufficient means of support,

and that it will not be necessary to use either the income

or the corpus of the trust estate hereby created to prop-

erly provide for his education, maintenance and support;

and, if the income trom the trust estate be not needed

tor these purposes, then all of the income from said

trust estate not so needed shall be by the Trustee passed

to capital account of said trust estate, and shall be and

become a part of said trust estate, it being our hope that

all of the earnings and income of said trust estate during

the period of this Trust may be used to augment the

trust estate and be delivered to our said Grandson at the

periods herein provided for, It is expressly provided,

however, that our said Grandson shall be properly main-

tained, educated and supported, and if it be necessary

to use all of the income and even all of the corpus of

the trust estate hereby created and all augmentatiens

thereof, it shall be the duty of the Trustee to see that

this obligation shall be properly and reasonably dis-

charged.

“This trust shall endure and continue until our said

Grandson attains the age of twenty-five years, at which

tome the’ Trustee then acting shall deliver to him twen-

ty-five percent (25", ) of said trust estate and its ac--

cumulations, if any, and. shall retain the remainder

thereof until our said Grandson shall attain the age of

thirty years, when the Trustee shall deliver to him thir-

ty-three and one-third percent (33 1/3', ) of the total

amount of said estate then in his possession, including

also the accumulations thereof; and the rgmainder of

said estate shall be continued thereafter me: Grand-

son shall reach the age of thirty-five years, at which time

all of said trust estate remaining in the hands of the

Trustee shall then be delivered to our said Grandson,

These deliver es, however, are conditioned upon and sub-

ject to the continued life of our said Grandson until each

such period is reached.

“Li our sand Grandson, Wash Bryan Trammell, Jr.

’

shall die leaving issue him surviving, before all of said

trust estate shall be delivered to him, the said Wash Bryan

Trammell, Jr., then said trust estate then held by the

Trustee shall be held and administered by the Trustee

tor the benefit of such surviving issue of the said Wash

Bryan Trammeil, Jr., and shall be delivered to such

issue, share and share alike, when the youngest of such

issue shall attain the age of twenty-one years. If our said

Grandson shall die without issue before the trust estate

is finally delivered in full to him under the terms hereof,

shen all of the trust estate in the hands of the Trustee

at the time of his death shall be held and administered

by the Trustee for the use and benefit of our Grand-

daughter Sue Trammell, and shall be distributed to her

in the same manner, and at the same periods of her age

as herein provided for our said Grandson Wash Bryan

Trammell, Jr.; and if she, the said Sue Trammell, shall

die betore said estate is delivered to her by the Trustee

under the terms hereof and leave issue her surviving, said

estate shall be held and administered by the Trustee for

the penetit of such issue, and when the youngest of such

issue shall attain the age of twenty-one years said estate

shall be delivered to such issue share and share alike. If

the said Sue Trammell shail die withouteissue, however,

betore the distribution of said trust estate is completed,

the amount then in the hands of the Trustee shal] de-

scend to and be distributed to her heirs under the laws

of the State of Texas” (R. 54-56).

“The purpose in creating this trust is to provide for

the personal comfort, support, maintenance and wel-

fare of our said Grandson” (R. $7).

(d) The opening lines of the closing paragraph reads as

follows:

“For the protection, education, support and main-

tenance of our said Grandson we have made and exe-

cuted this instrument” (R. 62).

(¢) By the terms of Article Six the trust created by the

Trust INDENTURE is made “absolutely and finally irrevoc-

able,” with no reservation of any right “fo any interest in

said trust estate, nor to any income therefrom, nor to any

increase thereof, of any kind or character whatsoever, and

** * no defeasance of said trust estate under any terms, con-

ditions, or circumstances whatsocr er; and * * * no individual

iiterest of any kind or character in, to, or unto said trust

estate or any par? thereof” (R. 58-59). (Italics ours.)

The birthdays of the several grandchildren beneficiaries are

as follows (R. 45): * \

—LD

Ellanor Anne Fondren was born July 23, 1932.

Mary Doris Fondren gwas born March 20, 1930.

ag. ape Underwood was born October 1, 1933.

Was ryan Trammell, Jr., was born March 10, 1935.

Sue Trammell was born August 5, 1933.

Walter William Fondren IL, was born April 29, 1936.

David Milton Underwood was born March §, 1937.

On or about December 2, 1937, W. W. Fondren and ElJa

F. Fondren each gave to said W. W. Yondren, Trustee of and

for cach of said above mentioned seven (7) trusts, one hun-

dred (100) shares of Humble Oil & Refining Company

stock, the gift to the David Milton Underwood trust being

the first gift to such trust, and the gifts to the respective

trusts for the other grandchildren being gifts in augmenta-

tion of the respective trust estates as theretofore existing (R.

46). ;

The fair market value of Humble Oil & Refining Company

stock on December 2, 1937, the date on which said gifts to

suid respective trusts were mad by said W. W. Fondren and

Ella F. Fondren, was $59.75 per share so that the fair mar-

ket value of each of said 100-share gitts was $5,975.00 (R.

46).

W. W. Fondren continued to act as trustee in the adminis-

tration of gach and all of the trusts hereinabove mentioned

until his death on January’5, 1939, Upon the death of W. W.

Fondren the said Ella F. Fondren succeeded to the trusteeship

of each and all 62 said trusts, as provided for therein, whigh

trusteeship she has continuously since exercised and now ex-

ercises (R. 46),

The said Beneficiaries, Eanor Anne Fondren, Mary Doris

Fondven, Peter Fondren Underwood, Wash Bryan Tram-

mell, Jr., Sue Trammell, Walter Wilham Fondren, II, and

David Milton Underwood are all living at the date of’ the

trial of this cause (R. 47).

At all times subsequent to the creation of the trusts here-

inabove specifically referred to the parents of the respective

grandchildren beneticiaries have respectively, adequately, and

suthciently provided for the froper and adequate support,

maintenance and education of the said beneficiaries, with the

result that no part of either income or corpus of either of

said trust estates has been distributed, used. or apphed to or

for the benefit, support, maintenance or education of either

of said beneficiaries (R. 47).

In due time said W. W. Fondren and Ella F. Fondren filed

in regular course their Gift Tax Returns for the calendar

year 1937 and in said Gift Tax Returns showed each of the

above referred to gifts to said above referred to seven (7)

respective trusts and in connection with each of said gifts

in trust the sad W. W. Fondren and Ella F. Fondren each

claimed the statutory $$.000.00 annual exclusion and there-

fore respectively reported as to each of said gifts a taxable

gitt for the vear 1937 in the amount of $975.00 representing

the difference between the annual $5,000.00 exclusion and

the fair market value of the particular gift; to-wit, $5,-

975.00. Said W. W. Fondren and Ella F. Fondren then in

regular course paid gift taxes on the basis of the taxable gifts

so repdrted by them respectively as to each of said respective

trusts (R. 47-48).

Jn determining the 1937 gift tax deficiencies which are in-

volved in these proceedings, the Commissioner disallowed as

to each petitioner the seven exclusions of $5,000.00 each (or

total disallowed exclusions of $35,000.00 as to each petitioner)

whichshad been claimed by petitioners on account of gifts

above referred to. In his deticiency notice disallowing these

exclusions, the Commissioner made the explanation that said

gifts constituted gifts of futuré interests in property against

which no exclusions are allowable (R. 49).

The fair and reasonable cost of support, maintenance and

education of each of the grandchildren beneficiaries in ac-

cordance with the standard of living to which they were ac-

customed prior to and during the year 1937 would reason-

ably be nor less than $750.00 (R. 67).

W. W. Fondren left a will naming Ella F. Fondren Inde-

pendent Executrix of his Estate and in due time she made

application to the Probate Court of Harris County, Texas,

for the probate of said will and for letters testamentary. Ia

due course the will was admitted to probate and Ella F.

Fondren appointed and qualiffed as Independent Executrix

of the Estate of W. W. londren, Deceased, in which ca-

pacity she now acts (R. 47). °

SPECIFICATIONS OF ERROR

First Assignment of Error:

_ The United States Circuit Court of Appeals for

the Fifth Circuit erred in holding that the gifts

Sl ~*

“

under consideration constituted gifts of future in-

terests.

Second Assignment of Error:

The United States Circuit Court of Appeals for

the Fifth Circuit erred in disallowing the $5,-

000.00 statutory exclusion in connection with

each of the several gifts now under consideration.

Summary of Argument

The judgment and decision of the United States Circuit

Court of Appeals for the Fifth Circuit under review herein

is erroneous for the following reasons:

Each of the gifts now under consideration, immediately

upon its consummation, constituted a gift to the specifically

named grandchild beneficiary then in esse.

II.

Each of the gifts now under consideration, immediately

upon its consummation, Was made to and for the benefit of

the specitically named grandchild beneficiary.

>, II.

Each of the gitts now under consideration, immediately

upon its consummation, was available, both income and

corpus, to the specifically named grandchild beneficiary for

his or her personal comfort, support, maintenance, welfare,

protection and education and has continued so available

down to the present time,

onenee RN

IV.

At no time subsequent to the making of the gifts now un-

der consideration did any person whomsoever have any right

or discretion to withhold from or deny to the specifically

named grandchild beneficiary the use, possession or enjoy-

ment of any part of either income or corpus reasonably

necessary or proper for the personal comfort, support, main-

tenance, welfare, protection and education of said grand-

child beneficiary,

By no proper construction of the trust instruments now

under consideration can it be held that any «discretionary

power was vested in the trustee or any other person to with-

hold from or deny to the specifically named grandchild

beneticiary the right, immediately upon the consummation

of the gift, to demand and receive, primarily from income

but secondarily from corpus, each and every distribution

proper to be made for the personal comfort, support, main-

tenance, welfare, protection and education of said specifically

named grandchild beneficiary.

Vi.

By no proper construction of the trust instruments now

under consideration can it be reasonably held that the use,

possession and enjoyment of the respective gifts by the spe-

cifically named grandchild beneficiary depended upon th

survivorship of the particular beneficiary in any different way

than the use, possession and enjoyment of, property by a fee

sa ple owner thereof is dependen: upon the continued sur-

vival of such fee owner.

VIL.

Neither of the gifts ‘under consideration constitutes either

a reversion, remainder or any other interest or estate limited

to Commence in use, possession or enjoyment at some future

date or time,

VII.

Each of the gifts now under consideration, immediately

upon its consummation, vested in. the specifically named

grandchild beneficiary all such use, possession and enjoyment

as such grandchild beneficiary was capable of exercising at

the time of the gift.

IX.

Each of the gifts now under consideration, immediately

upon its Consummation, vested in the definitely named grand-

child beneficiary the fullest use, possession and enjoyment

that was possible to be sensibly conterred upon a child of

such tender age.

Neither of the gifts under consideration constitutes a gift

of future interest within the meaning of any principle an-

nounced in either of the following cases:

Untrep Starrs v. Pitzer, 312 U.S. 399—In this case a

gift was keld to be a gift of future interest where the gift

Was made for the benefit of eight living grandchildren and

all after born grandchildren, and no distribution was per-

mitted to any beneficiary during the ten year period next

succeeding the making of the gift and with distribution

atter the expiration ef said ten-year period to be made only

to such beneticiaries as should live to attain the age of twen-

ty-one years.

RYERSON vy. UNITED Sra res, 312 U.S. 405—In this case

the gift of insurance policies on the life of the donor was

held to be a gift of future interest where no distribution

could be made to a beneficiary unless such beneficiary

| ~

should survive the donor and where the trust was subject to

be terminated either by the joint action of two of the trustees

or by the death or mental incapacity of either of the trustees,

lisCHER V. COMMISSIONER, 132 F. (2d) 383—lIn this case

the gift of the corpus of the trust was held to be a gift of

future interest where the gift was made or the benefit of

six minor grandchildren and no distribution of the corpus

could be made to any beneficiary until such beneficiary

should attain the age of twenty-five years.

COMMISSIONER OF INTERNAL REVENUE v. WELLS, 132

F. (2d) 405—In this case the gift was held to be a gift of fu-

ture interest where the gift was made for the benefit of a

minor child and distributions prior to the time when the

beneficiary attained the «ge of twenty-one years were entirely

and exclusively in the discretion of the trustee.

SENSENBRENNER V. COMMISSIONER, 134 F. (2d) 883—

In this case the gift of the corpus of the trust was held to be

a gift of future interest where the gift was made for the

benefit of a minor grandchild and no distribution of corpus

‘could be made until a designated future date.

COMMISSIONER Vv. PHitiips’ Estate, 126 F. (2d) 851—

In this case the gift was held to be a gift of future interest

Where the trustee was authorized, if he should see fit to do

so, to make d= tributions to the beneficiaries in such amounts

as such trustee deemed desirable or necessary, and with the

discretionary power vested in the trustee to increase or de-

crease distributions from time to time as he might consider

proper.

XI.

Fach of the gifts now under consideration, immediately

upon its consummation, constituted a gift of a present interest

because under any proper construction of the trust instru-

ments the functions of the trustee were the identical func-

cons which a guardian of a minor would ordinarily per-

form and therefore the use, possession and enjoyment of the

trustee was in legal contemplation the use, possession and

enjoyment of the minor.

XII.

Fach of the gifts now under consideration, immediately

-upon its consummation, constituted a gift of a present in-

terest because under any proper construction of the trust

instruments the giit to the minor grandchild was immediate,

definite, absolute and irrevocable, and in no sense dependent

upon the happening of any future event either for the de-

termination of the identity of the donee or the quantum of

the donation. \.

Argument

SUBDIVISION A. Brief Statement Con erning Exclusion Pro-

VISIONS of the Federal Revenue Acts and Regulations

The First Federal Gift Tax Law was enacted in 1924 It

Was in no sense an involved statute and levied a graduated

gift tax on gifts totalling for@ny particular tax year in ex-

cess of $50,000.00, with a specie limitation that gifts to

any one donee totatling $500.00 or fess for the particu! ar

tax year should be excluded in computing net taxable gifts.

The 1924 Act was repealed 1 in 1926, and trom the date of such

repeal until the effeCtive date of the 1932 Act there was no

Federal Gift Tax statute, though during this intervening

period numerous questions came before the Treasury De-

partment and the Courts as to the interpretation and ap-

plication of the 1924 Act.

When the 1932 Act was pending before Congress, the

legislative committees had the benefit of the prior experience

in the administration of the 1924 Act and as a result of this

Pe IRRIPRTR NINETY

experience one important change in the fundamental policy

of the law was made, in that the-1932 Act provided for only

one specific $50,000.00 exemption in lieu of the annual $50,-

000.00 exemptions as authorized by the 1924 Act. In other

respects the 1932 Act was of similar pattern with the 1924

Act though in view of the drastic change as to the $50,-

000.00 exemption, the policy with reference to small gifts

was liberalized to provide for the exclusion of gifts (other

than gitts of future interest in property) to one party during

taxable year totalling not in excess of $5,000.00. The Com-

mittee Reports, Revenue Act of 1932, in referring to the non-

exclusion of future interest gifts, is specific to the effect

that the $5,000.00 exemption is available only insofar as

donees are ascertainable, and that denial of exemption “is

dictated by the apparent dithiculty, in many instances, of

determining the number of eventual donees and the values of

their respective gifts.”

In the administration of the 1932 Gift Tax Law two ques-

tions presented themselves for consideration in connection,

with gifts in trust. One question was whether the donce

of the gift was the trust or the beneficiary of the trust. The

other question involved the matter of distinguishing between

gifts in trust constituting gifts of present interests and gifts

in’ trust constituting gifts of future interests. An answer

was ultimately found to the first question and it is now -well

settled that for the purposes of the :932 Gift Tax statute

the beneficiary of the trust is the donee.

As to distinguishing between gifts of present and future

interests, however, no satisfactory rule had been promulgated -

by reason of the fact that this matter depends so largely on

the wording of the particular trust instrument. In view of

this situation the Treasury Department in 1938 presented to

Congress for its consideration the advisability of amending

the Federal Gift Tax Law so as to deny exclusion to all gifts |

in trust. |

The .1938 amendment to the Gift Tax statute accom-

plished this change in the law effective January 1, 1939; and

this change continued effective until January 1, 1943, as

of which date the Revenue Act of 1942 became operative

to again authorize exclusion of gifts in trust if they are other

than gifts of future interest.

At the effective date of the gifts under consideration the

applicable provisions of the Revenue Act and Regulations

read as follows: (

NSS

Subdivision (b) of Section 504 of the ReveNuE Act

or 1932, read,

(b) Gifts Less Than ve the case of gifts

“(other than 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

net, tor the purposes of Subsection (a), be included

in the total amount of gifts made during such year,

Article 11 of REGULATION 79 (1936 Edition), contained

the following language:

“Future interests” is a legal term, and includes re-

versions, remainders, and other interests or estates,

whether vested or contingent, and whether or not sup-

ported by a particular interest or estate, which are lim-

ited to commerce IN use, possession, or enjoyment at

some future date or time.”

Such was the status of the Federal Gift Tax law and regu-

lations in 1937 when the gifts now under consideration were

made. é

ai 1y

Suspivision B. Brief Statement Concerning Fact Situation

at Time Gifts Were Made

W. W. Fondren and wife, Ella F. Fondren, respectively

grandfather and grandmother of the seven (7) specitically

named beneficiaries, aware of the uncertainty of human af-

fairs and the serious possibility of financial reverse, under-

took to provide for their several grandchildren some reason-

able measure of security for support, maintenance, education

and comfort. At the time the gifts were made each of said

grandchildren were of tender years and utterly unable to

administer property for themselves, so that it was impossible

that any gift could be reasonably made without the inter-

vention of a guardian, trustee or other person to properly

protect the interest of the minor beneficiary. It is reasonable

to assume that the trustors, after mature consideration and

from the standpoint of minimizing expense and incon-

venience, decided that it would be much preferable in the

creation of the trust, to name themselves as trustees, and the

trust instruments under consideration were accordingly so

prepared and executed. The purpose of the trusts was most

detinitely stated and their irrevocability was provided in no

uncertain terms,

Even a cursory reading of the trust instruments leads to

the conclusion that they were thoughtfully prepared, and

what would have been more natural than that these grand-

parent donors, having concluded that they should act as trus-

tees, would have felt a decided urge to reserve to themselves

some discretionary power in the matter of determining whe-

ther or not, and the extent to which, distributions to the bene-

ficiary should be made. How easy and how ratural it would

have been to have inserted in these trust instruments such

a provision if such wasin fact the intent; and yet how utterly

lacking is any such provision,

The word “discretion” appears nowhere in the trust in-

struments, but the whole tenor and declared purpose of each

of the several instruments is the welfare of the specifically

named grandchild beneficiary.

True it is that the trustors did feel that distributions out

of corpus might be of move serious concern than distribu-

tions out of income; but even here it is in no sense the dis-

cretion of the trustee, but the continued and ample protec-

tion of the beneticiary, that is made whe test. Necessarily, in

the case of a small child, some competent person must be the

primary judge as to the necessity and extent of reasonable

requirements of the beneficiary; and under the trust instru-

ments as finally executed, the preliminary, but by no means

conclusive, determination of th:s most important matter was

contided to the trustee.

The dominant and controlling purposes for which the

trusts now under consideration were created are most defi-

nitely shown by the following references to the provisions

of the trust instruments, to-wit:

1. The opening paragraph provides that the grantors ‘‘do

hereby make, establish, publish and declare a trust and

gitt for” the specifically named grandchild.

Article Three provides that out oi the trust estate

hereby created “the trustee shall provide for the sup-

port, maintenance and education of” the specifically

named grandchild.

3. Article Five provides that “the purpose in creating this

trust 1s to provide for the personal comfort, support,

maintenance and welfare ot” the particularly named

grandchild,

4. The opening lines of the last paragraph read “For the

protection, education, support and maintenance of”

the particularly named grandchild “we have made and

executed this instrument.”

SUBDIVISION C. Discussion .

Preliminary to the examination of the exact nature of the

gifts now under consideration it will be helpful to keep in

mind that the congressional committee reports show that

when Congress was considering the gift tax provisions of the

RevENUE Act of 1932 no suggestion was made that exclusions

should be denied in cases of gifts for the benefit of definitely

identified beneficiaries in essee at the time of the making of

the gifts.

It is also of interest to note that up to the time the gifts

under consideration were made Congress had never attempted

to deal with gifts in trust on any different basis than other

gifts, so that if exclusions are, not to be allowed in the in-

stant case the disallowance can be predicated only on the

fact that the gifts are gifts of future interests.

It is also to be noted that the only reason ever referred to

by the congressional committees for denying exclusion of

future interest giftts-was the apprehended dithculty of de-

termining the number of eventual donees and the value of

their respective gifts.

The several exclusions claimed by your Petitioners refer

only te gifts to the specifically named grandchildren bene-

ficiaries, all’of whom were in being at the date of the par-

ticular gift. There is no question of identity of donee, and

no occasion for undertaking to apportion any gift between

two or more beneficiaries.

Petitioners recognize that Article 11 of Regulation 79

(1936 Edition) was effective and binding in accordance with

its provisions on December 2, 1947, the date of the making of

the gifts now under consideration.

Petitioners furthermore admit that if the reasonable con-

struction of the trust instruments is to the effect that the use,

possession or enjoyment by the specifically named grand-

child beneficiary was to be had only at the discretion of the

» be,

-~-

trustee, then, under well reasoned authorities, the gifts were

gitts of tuture interests.

In its opimion in the instant case the Tax Court of the

United States stated that notwithstanding it was made the

express duty of the trustee to see that the specifically named

grandchild beneficiary was properly maintained, educated

and supported, and if necessary to such end to use both the

entire income and corpus of the trust, nevertheless the per-

formance ot this duty required the exercise of discretion on

the part of the trustee in such sense as to constitute the gifts

future interest gifts within the meaning of the revenue act

and the applicable regulations; and in support of this con-

clusion the Court cited the following cases:

Smith v. Commissioner (C.C.A., 8th Cir.), 131 Fed.

(2d) 254; :

Weich v. Paine (C.C.A., Ist Cir.), 130 Fed. (2d) 990;

Winston Paul, 46 B.T.A. 920:

Lillian Seeligson Winterbotham, 46 B.T.A. 972;

Mary M. Hutchings, 1 T.C. 692.

A brief reference to these cited authorities will show that

they have no reasonable application to the case in hand.

In SMITH Vv. COMMISSIONER (supra), the trust instrument

expressly provided:

“Trustee shall be and is empowered and directed, in

his sole discretion, to use the principal and income from

said estate for the purpose of the education and prepara-

tion of said bereficiaries to attain and occupy an ad-

vantageous and desirable position in life.”

“The Trustee is authorized and directed to expend

any or all of the principal sum of said Fstate, as in his

judgment and discretion may be found necessary, for

the personal care and maintenance of said beneficiaries

herein, and is authorized to provide, furnish and pay

for any or all professional or medical services or at-

tendants, during any illness cf beneficiaries.”

In WetcuH v. Paine (supra) the trusts were created for

the trustee’s children “now living or hereafter born, in equal

shares”; and the trust instruments expressly provided that

the trustee could “in his discretion * * * accumulate or with-

hold and make payments or distributions of shares and in-

come to or for the education or support of any” of the

beneficiaries “as the trustee may deem best” with the further

provision that in the discretion of the trustee any beneficiary

“may be given outright at any time in whole or in part his

or her share in the trust figured on the number” of beneti-

ciaries then living.

In WINSTON PautL (supra) the trust instrument provided

that the income was distributable

“in such proportion as the trustee may in his absolute dis-

cretion determine.”

In LintiaAN SEELIGSON WINTERBOTHAM (supra) the in-

come was distributable in such proportions as to the trustees

‘shall seem fit and proper * * * (such portion to be de-

termined solely in the judgment and discretion of said

Trustees, and without any control over them in the ex-

ercise of such judgment or discretion) * * * ”

In Mary M. HutcHines (supra) the income could either

be accumulated or distributed in the “sole and absolute dis-

cretion” of the trustee.

Certainly no one would wish to question the soundness

of the decision in either of these cases with the possible ex-

ception of the case of SMITH Vv. COMMISSIONER as to which

latter case the criticism of the United States Tax Court in its

Fie

opinion in the instant case may be justified. In this case of

SMITH V. COMMISSIONER distributiofs were to be in the

“sole discretion” of the trustee, and expenditures of any or

all of the corpus were authorized to the extent that in the

“judgment and discretion” of the trustee such expenditures

might be “tound necessary, for the personal care and main-

tenance of said beneficiaries.” But in spite of this unusually

strong language, the United States Circuit Court of Appeals

tor the 8th Circuit held that the disc retionary power of the

trustee was not such as to permit the trustee to ignore the

dominant and controlling purpose of the trust, namely, the

well being of the beneficiary. since such a construction would -

be “tantamount to hgiding that the trustee might carry out

the settlor’s directions or ignore them, in accordance with his

notion of the proprieties or at his discretion.”

in all events these cases, and nrany others not cited by The

Tax Court, firmly establish the rule that the discretionary

power of the trustee to control the use, possession and enjoy-

ment by the beneficiary, renders the interest of such bene-

ficiary a future interest within the meaning of the Federal

Gift Tax statutes. In all these cases this principle was recog-

nized and applied; in the last four cases to deny exclusions

because under the trust instruments involved the discretion

of the trustee was held to be controlling, and in Suri v.

COMMISSIONER to uphold the exclusion. because, notwith-

standing the strong language used, the court was of the opin-

ion that the reasonable interpretation of the entire trust in-

strument was to make the discretion of the trustee subor-

dinate to the declared purposes of the trust.

How much stronger is the instant case where the purpose

of the trust to provide a present interest in the specifically

named beneficiary could not have been expressed by more

cogent language and where there is a complete absence of dis-

cretionary power on the part of the trustee. >

25.

There are many other decisions in which the discretionary

power of the trustee has been held etfective to constitute the

gifts in trust gifts of future interest; but in all these cases the

powers of the trustee are evidenced by language so clear and

definite that there can be no reasonable doubt as to the exer-

cise of discretion by the trustee being made the basis of the

beneticiary’s rights. We have made a most diligent search of

the authorities and the instant case is the only case in the books

in Which an attempt has been made to tind a controlling dis-

cretionary power in the trustee where the phraseology of the

trust instrument contains neither the word “discretion” nor

other comparable term.

In the instant case the majority opinion of the United

States Circuit Court of Appeals for the Fifth Circuit con-

tents itself with the statement that the gifts in’question are

gifts of future interests and that no annual exclusions are al-

lowable and then, without giving any reasons tor these con-

clusions, cites the following cases as supporting the decision.

United States v. Pelzer, 312 U.S. 399;

Rverson v. United States, 312 U.S. 405;

Fisher v. Commiusioner of Internal Revenue, 132 F. (2d)

383;

Commissioner pf Internal Revnue v. Wells, 132 F. (2d)

405:

Sensenbrenner y. Commissioner of Internal Revenue, 134

F. (2d) 883;

Commissioner of Internal Revenue v. Phillips’ Fstate,

126 F. (2d) 851.

Your Petitioners recognize all of these cited cases to be prop-

erly decided and to correctly announce the principles of law

appticable to their respective facts; but it is most respectfully

submitted that neither of these cases nor any rule of decision

announced therein can, by any reasonable,or proper apph-

cation, support the decision of the Circuit Court of Appeals

in the instant case.

In Univep Starts v. PeLzer (supra) the trust was created

tor ten then living grandchildren of the donor and such other

grandchildren as might be thereafter born. No distribution

of either income or corpus was permitted to be made until

after the expiration of the ten year period next following

the making of the gift, and even @fter the ten year period

the distributions were to be made to only those persons who

at the time of the particular distribution should comprise the

beneficiaries of the trust. The gifts were held to be gifts of

future interests.

In Ryerson v. UNitep Sratrs (supra) the gifts consti-

tuted two insurance policies, one to each of two trusts. One

trust instrumenc, executed in 1933, provided that during the

lite of ene of the trustees one-fourth of the net income to

the trust should be distributed to such trustee with remainder

over for life to her two daughters if surviving at her death,

and with further remainders over to their issue per stifpes, but

with the further provision that the trust could be terminated

by the joint action of the two trustees or by the survivor in

the event of the death of one. The other trust instrument,

executed in 1934, provided that one-third of the income was

to be paid to the widow of trustors’ son for life, with re-

mainders over to those persons who would be heirs at law of

the son had he died at the same time as the life tenant.

In connection with the 1933 trust instrument the question

of the nature of the life interest of the trustce in the one-

fourth of the net income to be distributed to her was not

properly before the court and therefore is not dealt with in

the opinion; but the court specifically decided that the in-

terest of the other daughter, dependent as it was upon the

possibilty of the prior termination of the trust by the jeint

action of the two trustees, was a future interest.

In connection with the 1934 trust iv was held that the gift

was one of future interest because even the gift to the son’s

widow was contingent upon her surviving the donor at a fu-

ture date.

In FisHikR v. COMMISSIONER OF INTERNAL REVENUE

(supra) the trust was tor the benefit of donor’s six grand-

childrefi and while the income to the trust was to be distrib-

uted annually, no distribution of corpus was permitted to be —

made to any beneficiary until such beneficiary should have

attained the age of twenty-five years. The court held that as

to income the gift constituted a gift of a present interest but

that the postponement of distributions of corpus until the

beneficiary should reach the age of twenty-five years made

the gitt of corpus a gift of future interest.

In COMMISSIONER OF INTERNAL REVENUE V. WELLS (su-

pra) the trust was for the benefit of trustor’s two children.

The trust indenture named the donor’s wife as trustee and

provided that the amount of income and principal to be dis-

tributed to the beneficiaries should rest entirely in the discre-

tion of the trustee. The court properly held the gifts to be

gifts of future interests.

In SENSE NERENNER V. COMMISSIONER OF INTERNAL REV-

ENUF (supra) each of the seven trusts was for the benefit of

a particularly named grandchild. The trust instruments pro-

vided that during the minority of the particular beneficiary

the income to the trust was to be paid cither to the donor or

to a designated person to be applied by the recipient for the

support, maintenance and education of the particular grand-

child beneficiary in such manner as the person receiving the

pavment should in his sole discretion deem best. No distribu-

tions of corpus was permitted to be made until the definite

future date specifically provided in the trust indenture.

The decision was that the gift of corpus constituted a gift

of future interest because its distribution was expressly post-

- -

> { {

poned to a fixed future dace, but that the gift of income was

a gift of present: interest notwithstanding that during the

minority of the beneficiary no distribution of income was au-

thorized to be made direct to the beneficiary, but such dis-

tributions were to be made only to other named Parties to be

used for the benefit of the minor beneficiary in such Way as

such distributee in his sole discretion should deem best.

In COMMISSIONER. OF IN TERNAL REVENUE v. PHILLIPs’

Esrare (supra) the trust was created for the benefit of. thir-

teen beneficiaries, and the trustee was authorized, after pay-

ing the expenses incidént to the administration of the trust,

it he should see fit ta do so, to pay to the beneficiaries an al-

lowance in such amount as the trustee might deem desirable

or necessary, and with the discretionary power from time to

time to increase or decrease said allowance whenever he should

deem it to the best interest of the beneficiaries. The trust in-

strument expressly provided that nothing therein contained

should be construed to make it obi: gatory or mandatory on

the trustee to pay any income or allowance to said benefici-

aries or any of them prior to either the death of the trustor

or the expiration 6f ten years from the date of the trust in-

denture, whichever should first occur. The court properly

held the gift to be a gift of future interest as to both income *

and corpus.

‘mong other enlightening cases dealing with the effect of

discretionary power of the trustee are the cases of Comas-

SIONER V. Taylor, 122 Fed. (2d) 714 (decided August 29,

1941}, and Dissvon v. Comiissioner OF INTERNAL REV-

ENUF, 144 Fed. (2d) 115 (decttied July 12, 1944), and which

cases were decided by the United States Gireuit Court of

Appe als for the Third Circuit.

In the case of ConMissioner v. TAyide, (supra) the

trust instrument contained the following provision:

osiet

‘the income which may become payable under the terms

hereof to any minor child of said John M. Taylor shall

be accumulated by Trustees for such child and paid over

to such child when he or she shall attain. the age of twen-

ty-one years, unless in the opinion of Trustees, in their

sole discretion, such income or accumulated income

should at any time during the minority of such child

be needed for his or her proper education or support, in

Which event Trustees ji apply any part or all of such

income and or accumulated income, as Trustees in their

sole discretion may deem expedient, for the education and

support of such child during his or her minority.”

and the court by majority opinion held that the gifts con-

stituted gifts of future interests. Certainly the phraseology

of the trust instrument affords ample support for this

decision, but notwithstanding the use of the words “in their

sole discretion” Criutre justice Marts felt constrained to

write a dissenting opinion wherein he expressed the view

that the discretion vested in the trustees was not an arbitrary

one, that the authority of the trustees “was conferred upon

them solely for the beneiit of the minors,” and that even

under the strong language then being considered the gift

“was substantially the same as in the ordinary case of an

absolute gift of income to the minor.”

In the case of DisstonN v. COMMISSIONER. OF INTERNAL

RiveNvek (supra) two trusts had been created for the benefit

of irustor’s children and at the time the gifts were made

certain of the children beneficiaries were minors.

he trust indentures prov! ided that during the minor ity ot

‘neficiary such beneficiary's interest in the income to the

fust should be accumulated and paid over to him when he

should become twenty-one years of age, but with the express

provision that’ during the minority of any beneficiary the

nould use for the benefit of the miner such ncome

port of the respective minors, and shall accumulate for

each minor until he or she reaches the age of twenty-one

years all income not so needed.” This last quoted provision

was made express superior to the provisions of the trust

indenture directing the accumulation of income.

With reference to the distribution of corpus the trust

indentures provided that no part of the corpus of the trust

should be distributed to a beneficiary until such beneficiary /

should attain the age of forty-five years; but certain rights.

of testamentary appointment were vested in the beneficiary !

——

At ee el inten

prior to ,his becoming forty-hve years of age, and in the

absence of such appointment, the trust estate was to pass to

his or her descendanis and if no descendants to the settlor’s

_other children, ,

The decision in this case was by divided court. The ma- |

lority opinion by Jones, C. J., was concurred in by Circuit

Judges Maris, GooprictHt and MCLAUGHLIN. The dissenting

opinion was by Circutr JUDGE BicGs.

The majority opinion discusses at length the provisions of

the trust indentures in the light of the decisions in UNirer¥

Srares Vv. Peczer (supra) and Ryerson v. UNtvep STATES

(supra), and after reaching the conclusion that these last

mentioned cases had no application to the facts then before

it, the Court decided that the gifts constituted gifts of

present interests and therefore entitled the donor to the an-

nual exclusion provisions of the Revenue Act.

In view of the similarity of the facts in this case of Diss-

fON V. COMMISSIONER OF INTERNAL REVENUE with the

facts in the instant case, and of the fundamental soundness,

of the priticiples announced by Justice JONEs and his as-

sociates, we quote the following excerpts from the majority

opinion:

“the gifts tu the miaor children were immediate, detinite, A

absolute and irrevocable. In no respect did they depend

upon the happening of an uncertain future event either

for the determination of the donees or the quantum of

the gifts.”

“By direct contrast (the United States v. Pelzer,

supra, and Ryerson v. United States, supra) the gifts

to the miners in the instant case, which were imme-

diate and absolute, when made, and did not depend upon_-

the donees’ survivorship or the happening of any uncer-

tain future event, were gifts of present interests.”

(Parenthesis inserted by us for explanatory purposes. )

‘he provision for the accumulation of income af-

fected neither the identity of the minor donees nor the

value of the gifts. At most, the provision was but com-

pliant recognition by the donor of what the law, out

of its solicitude for the safeguarding of a minor’s prop-

erty, would have interposed in the absence of the donor's

express direction in such regard.”

“In the test laid down by Art. 11 of Regulation 79

for determining a future interest, the terms, “use, pos-

session or enjoyment,” are used disjunctively. A present

possession of an absolute and irrevocable gift is not,

therefore, to be submerged by a supposed lack of use or

enjoyment which, in turn, rests upon no more than that

the income is accumulated for the minor beneficiary

during his minority rather than paid directly into his

hands.”

“We can find nething in the statute or in its evident

purpose (United States v. Pelzer, supra) to warrant im-

puting to Congress an intent to penalize gifts to minors.

merely because the legal disability of their years pre-

cludes them for a time from receiving their income in

hand currently.”

“Nor did the authority to the trustees to use, in their

sole discretion, the income from the gifts to the minors

for their support and education during minority make

the income from the gifts any less the minors’ property.

The discretion was sole only in that it was: for the trus-

tees alone to exercise. But, that did not mean that the

trustees might exercise the discretion arbitrarily or

capriciously, The discretion was a legal one and, there-

fore, reviewable by a court of competent jurisdiction

for an abuse of its exercise. The discretion thus reposed

tuok nothing away from the absoluteness of the gifts.”

“In our opinion an immediate and irrevocable gift to

4 minor in trust, not dependent for its consummation

or continuation upon the happening of uncertain future

events, Constitutes a transfer of a present interest not-

withstanding that the deed of gift provides for the ac-

cumulation of the income during the beneficiary's

minority and authorizes the use thereof by the trustees,

in their. sole discretion, for the beneficiary’s support

and education during minority.”

Now lez us consider the salient facts of the instant cases in

the hight of the cases hereinabove referred to.

The first paragraph of Article Three of the trust’ now

under consideration, after specifically providing that “out of

the trust estate hereby created * * * the trustee shall pro-

vide for the support, maintenance and education of” the

particular named grandchild, continues as follows:

“It it is necessary to use any of the corpus of the estate

for that perpose and in the judgment of the trustée it

is best to do so, said trustee may make advancements

out of the corpus of said estate for such purpose for the

benefit of our said grandson (granddaughter) .”

in construing this language we must keep in mind that

when the gifts now under consideration were made the spe-

cifically named beneficiaries were respectively trom one to

seven years of age, and that the paramount and controlling

purpose of the several trusts was to provide for the protec-

tion, education, support and maintenance of the named

grandchildren, and that it was expressly made the duty of the

trustee to carry out this purpose. Certainly neither in the

light of these definitely announced purposes, nor indeed

from the point of view of common human experience, is it

reasonable to find any discretionary power in the trustee as

such term is used in the gift tax cases. In these cases discre-

tion Means a power to originate the benefit or advantage, to

initiate the effectiveness of the beneficence. Freedom of de-

termination and uncontrolled choice is of its essence. The

word “judgment” as used in the trust instruments now un-

der consideration has no such connotation, The purpose

of the trust and the obligation of the trustee to respect such

purpose is clear and unequivocal. The present protection

of the ‘grandchild of tender years was assured just as far

as #t was humanly possible to be accomplished by the use of

cogent language. The obligation of the trustee to carry out

the purpose of the trust was expressly stated, and the mere

fact that there was vested in the trustee the pre!iminary re-

sponsibility to inquire into and evaluate the needs of a small

child unable to act on its own account should not reasonably

be effective to defeat the declared purpose of the trust.

But respondent contends that the right of the specifically

named beneficiary to the use, possession and enjoyment of

the trust estate is dependent upon his or her survivorship;

and stress is placed upon those provisions of Article Three,

in which the trustors expressed the hope that the named

beneficiary would “have other adequate and sufhcient means

ot support, and that it will not be necessary to use either the

income or the corpus of the trust estate hereby created to

properly provide for his (her) education, maintenance and

support;” and then provides that if the income should not

be needed for the purposes stated it should be passed to

capital account as a part of the trust estate.

Keeping in mind that the paramount purpose of the trust

Was to assure to the specifically named grandchild beneti-

ciaries their protection and weil being continuously through-

out the period of immaturity from the very instant the trusts

were created until the final distribution dates, we appreciate

the fact that this present assurance required that the corpus

of the trust be reasonably sateguarded. It was this present as-

surance of continued well being that formed the controlling

purpose of these trusts, and how evanescent and unsubstan-

tial, how utterly invaluable, would have been the right of

the beneficiary without some reasonable provision looking

to the protection and augmentation of the trust to the ex-

tent that such protection and augmentation were consistent

with present and continued maintenance and well being of the

named beneficiary. It is true that a present gift to an im-

mature child without providing reasonable protection of the

corpus of the gift would be of some value, but how much

greater this value is if the gift be accoirpanied by proper

safeguards for its protection and effective use. In the one case

the child might live like a king while the gift was being

consumed. In the other case the well-being of the beneficiary

is made doubly sure; first, by making the entire fund available

tor the child’s protection, and second, by providing for the

Preservation of the trust estate where such preservation is

consistent with the controlling purpose of the trust.

The express language of these trust instruments admits of

no misunderstanding as to their underlying purpose and in-

tent; and these hopeful expressions were not permitted to

stand alone or even to be of equal dignity with the other

provisions of the trust instruments, but in the very paragraph

by which created were made expressly subordinate to the gen-

eral purposes of the trust by the concluding sentence which

reads as follows:

“Tt is expressly provided, however, that our said grand-

son (granddaugh er) shall be properly maintained, edu-

cated and supported, and if it be necessary to use all of

the income and even all of the corpus of the estate hereby

created and all augmentations thereof, it shall be the

duty of the trustee to see that this obligation shall be

. ~ 77" _

properly and reasonably discharged.

Ultimate dates for final distributions of the corpus were

specifically provided, and to the extent that the trust estate

should not be earlier distributed, the survivorship of the spe-

cifically named grandchild beneficiary until the specified dis-

tribution date is a prerequisite to its receiving such distribu-

tion. In this sense the survivorship of the beneficiary would

be determinative of capacity to share in the particular dis-

tribution. But this is merely to say that continuation of life

is a preliminary requirement to the future enjoyment of

property rights. Certainly one cannot enjoy property after

his decease; but this fact constitutes no proper basis for

holding that the interest of a fee simple owner of property is

a future interest because such owner may die tomorrow. The

question is not what use, possession and enjoyment may

ultimately be appropriated by the beneficiary, but rather

what is the vested and fixed right today; and it is respect

fully submitted that immediately the gifts under considera~

tion were made the specifically named beneficiary had a vested

and fixed right, uncontrolled by any discretionary power of

the trustee to alter, change or ignore; and that this right

Was a present interest and not a future interest.

In connection with the possible effect of the discretionary

powers of the trustee in the instant case a brief reference

Mio one other phase of the trust indentures is proper to be

_made.

in its opinion in the instant case The Tax Court of the

United States suggested that

‘such phrases as ‘“‘in the judgment of the trustee,’ ‘for

best interest of said trust estate,’ and ‘if it be necessary,’

which recur frequently in each instrument, adequately

vest the trustee with discretionary power and authority.”

An examination of the trust instruments shows that these

quoted phrases occur only in Article 2 and Article 3.

Article 2 deals with the powers of the trustee in the mat-

te of administering the trust esta-e, instituting and de-

tending htgation, and more particularly acquiring and dis-

posing of property. Naturally these matters should be handled

in such way as “in the judgment of the trustee” would be

“tor the best interest of the trust estate;”’ but it goes without

saying that The Tax Court did not intend to indicate that

these matters were discretionary in the sense that the trustee

could do as he pleased, and without any accountability to

the beneticiaries for the proper administration of the truse.

In Article Three the words “if it be necessary” occur

twice and the words “in the judgment of the trustee” occur

once, All of these provisions have been specifically considered

earher in thus brief so that further discussion at thjs point is

not felt to be in order.

In concluding this argument brief references to certain

phases of the cases of KINNEY v. ANGLIM, 43 Fed. Supp. 431,

and SFNSENBRENNER V. COMMISSIONER, 134 Fed. (2d) $83,

are considered to be in order.

in KINNiY Vv. ANGLIM (supra), the court was dealing with

the casein which the trust was created for the trustor’s three

granddaughters, with provision tor final distributions to the

beneticiaries when they should attain the ages of twenty-one

and thirty years. The income to the trust was to be paid to

the mothers of the several beneficiaries from the inception of

the trust until the parucular child should reach the age of

twenty-one years. The court held that the gifts to each of the

three grandchildren were zifts of present interests and the

three $5,000 exciustons were held to have been proper.

In SENSENBRENNER V. COMMISSIONER (supra), certain

trusts were created for the benefit of seven grandchildren.

The trust instruments provided that the income to the trusts

during minority of the beneficiary was to be paid either to

the donor or to another party designated in the trust instru-

ments, to be used by such distributee for the support, main-

pirat oeer

2a ere

ee ee a ee ee en oe

ne Gar aoe.

‘ad

“tenance and education of the particular grandchild in such

manner as the distributee should in his sole discretion deem

best. dhe corpus of the trusts was to be distributed at a de-

signated tuture date. Tne decision was that the gift of in-

come constituted a gift of present interest.

In each of these cases only the income was to be distrib-

uted and not the corpus; but even as to income, distribution

was not to be made to the minor child but to some other

purty by whom it might or might not be made available to

the child. In the opinion in KinNey v. ANGLIM no informa-

tion 1s given as to the obligation of the mother with reference

to income received by her, and it would therefore appear

that she might do with this income as she pleased. In SEN-

SENBRENNER V. COMMISSIONER the income was distributable

not to the minor beneficiary but either to a designated per-

son or to the donor to be used as such distributee in his sole

discretion might deem best.

Surely the rights of the beneficiaries in these two cases

were more tenuous and uncertain, and more dependent

upon the attitude and discretion of the mother in the one

cise and the donor or other distributee in the other case, than

are the rights of the beneficiaries m the instant case where

ic is made the express duty of the trustee to see that the

named benehciary be properly maintained, educated and

supported.

Conclusion

In the instant case there is no uncertainty as to the iden-

tity of the beneficiary and no problem of determining either

the number of eventual beneficiaries or the value of respec-

tive beneficial interests in the gifts. The gifts are immediate.

definite, absolute and irrevocable and in no way dependent

upon the happening of any future event cither for the de-

termination of the donees or the quantum of the gifts. The

specifically named grandchildren beneficiaries are given the

fullest use, possession and enjoyment possible «-nsibiy to con-

fer upon children of such tender years and the trustee can

withhold no reasonably necessary or proper support without

plainly violating the trust. It is therefore submitted that in

view of all the facts and circumstances attendant upon the

making of the gifts and of the obligation of the trustee to

carry out the underlying purpose of the trust, there is no

proper basis in either the law or regulations, or in the reason-

ing or governmental Policy supporting same,¢for holding

that ie gifts now under consideration are other than gifts

ot pyresent interests.

Prayer .

Wheretore Petitioners pray that the j’dgment of the United

States Circuit Court of Appeals for the Fifth Circuit afirm-

ing the judgment of the Tax Court of the United States

be reversed, and that the Supreme Court of the United States

render judgment herein decreeing that the several gifts under

consideration in this cause are gifts of present interests and

not gifts of future interests and that the annual $5,000.00

exclusions are proper to be made by your Petitioners in com-

puting their respective gift taxes for the year 1937, and that

the $8,400.00 gift tax deficiency heretofore assessed against

each of your Petitioners together with all interest on ac-

count thereof be cancelled and annulled, and that your Peti-

tioners be decreed all such other and further relief to w hich

they are justly entitled.

Respectfully submitted,

Ek. E. Townes,

W. M. CLEAvEs,

Attorneys for Petitioners

Of ( ON nsel

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