Brief for the Petitioner — Commissioner v. Disston

Supreme Court brief1945

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Opinions below - - - --5---=--------- sth ate ahi een memtonagait |

EE ae er a tbl cnn aameenhins ae

Questions presented. --..-----------------+------------ mike 2

Statute and regulations involved- ------------ puqenaccesscee 2

NN Perr errr rrr ree 4

Specification of errors to be a, Saas ibe cantainandenadds a

Summary of argument---------------------------------"-- 9

~ Argument: ,

I. The interests given to the minor beneficiaries were

: \ future interests... ...-------.-:----------¥--+--40

Il. The statute of limitatiqns does not preclude re pervent

determination of the amount of net gifts made by.

the taxpayer in prior years, for the purpose‘ of

determining the correct tax liability for the current

years.......----------++------- Oe es Sa te 23

NR i cn cancnsccbbatseccecssncevessids-ensesse- 26

co: ' . CITATIONS

Cases: . ‘ . ‘ :

Commissioner v..Brandegee, 123 F. 2d 58-------------- “ae 22

Commissioner v. Gardner, 127 F. 2d 929--- - ------------- ‘22

Commissioner v. Gooch Co., 320 U. 8. 418_..------- F 25

Commissioner v. Taylor, 122 F. 2d 714, certiorari denied, 2

SE clic anecddcdotnnapacpeessoin Sete Date AE § 8, 12

Fisher v. Commissioner, 132 F. ) ae eee «=~ 16,21

_ Fondren v. Commissioner, decided January 29, 1945.-.-.-- 9, .

11, 12,.15, 21

New Colonial Co. v. Helvering, 292 U. 8. 435-- /, 19

Roberts v. Commissioner, 2 T. C. 679, ‘affirmed, 143 F. 2d

657. certiorari denied, February 5, 1945__-.----------- 25

Sensenbrenner v. Commissioner, 134 F. 2d 883-_.--- ---- --- ' 16

Smith v. Commissioner, 131 F. 2d 254_-..- + ----------- i“ 20

’ United States v. Pelzer, 312 U.S. 399------ Sees Cae - 20

Wallerstein vy. Commissioner, 2 T. C.542..*% ---.------ “~"25

W interbotham v. Commissioner, 46 B. T. A. 972- --------- 25°

Wisotekey v. Commissioner, 144 F. 2d 632_.- _-. 13, 15, 19

Statutes: } “is :

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

See. 502__._- ~ aa

Sec. 504.4 BS Seiden _ 2

Bee. $17.2... -::- 3,24

* (1)

634420— 45-——-1

II '

: ’ Miscellaneous:

H. Rep. No. 708, “a0d Cong., Ist Sess., p. 29 (1980-1

Cause. Ball. (Past BD 460) o40. 3 cee wccccecnecdcgeccss

H. Rep. No. 2333, -77th Cong., 2d ‘Sess., _P. 37 (1942-2

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- Treasury Regulations 79 (1986. ed.): : y

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Inte Sore gor if the Winited Sines

7 7 OcTOBER TERM, 1944 Hee

. CoMMissIONER OF INTERNAL REVENUE, PETITIONER 3

i ' ee BP cal

| eres : . 3 a

~ _..... WiiraM D. Disston ©

ON WRIT OF CERTIORARI TO THE UNITED STATES CIRCUIT .

COURT OF APPEALS FOR THE THIRD- CIRCUIT

/ \ ;

_ BRIEF FOR THE PETITIONER

OPINIONS BELOW

- The Tax: Court entered a memorandum opinion

_ (R. 39-41) which is not reported. ‘The opinion

of the Cireuit Court of Appeals (R. (46-53) is

reported at 144 F. 2d 115. .

‘JURISDICTION | 7

The Sadeaiab of the Circuit Court of i cee

was entered on July 12, 1944. (R. 53.) The pe-) |

tition for a writ of certiorari was filed on Oc tober. -

12, 1944,-and was granted on February 5, 1945. °

The jurisdiction of‘ this Court is invoked under

- Section 240 (a) of the Judic ial Code, as emapet:

by the Act of February 13, 1925. ee :

ey oy ee

fer

. QUESTIONS PRESENTED

3 7 Whether gifts made by the taxpayer to his

minor children under trusts for their benefit were |

of ‘future interests in property”, and hence. not —

within the $5,000 exclusion provision of Section |

. 504 (b) of the: Revenue Act of 1932.

Ree Whether the. tax liability for the tax years is :

_ to be determined by correetly computing the ag- _

. gregate net gifts made by the taxpayer in prior

years, even ‘though the. amount of net gifts was .

erroneously computed in. the taxpayer’s returns

for those years and the tax liability for those years :

is closed by the statute of limitations. are

STATUTE AND REGULATIONS INVOLVED —

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

Sec. 502. CoMPUTATION OF TAX.

The tax for each caletidar year shall be :

- . an amount equal to the excess of —

(1) a tax, computed in accordance with

the Rate Schedule hereinafter set forth, on -

the dggrezate sum of the net gifts for such

“ealendar year and for each of ‘the preced-

ing: calendar years, over

(2) a tax, computed in accordance with

the Rate Schedule, on the aggregate sum of

the net gifts for each of the preceding cal-

endar years. 7

. * vie" * o-:

Sec. 504. Ner G ETS.

(a) General Defin: tion-The term ‘“‘riet

gifts’? means the total amount of gifts made

’

a ; a a

during the calendar year, less the’ * due

- tions ‘provided in section 505.. 3

(b) Gifts Léss Than $5,900.—In ~~ an

‘. 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 purposes of subsection (a}, be ineluded

in the total amount: of. _ made during

such year.

See. 505, Drepu CTIONS. [As snanind by

See. 301 (b) of the Revenue’ Act of 1935.].

in computing net gifts for any calendar .

year there shall be allowed as deductions:

(a) Residénts.—In_ the case of \a. citizen

or resident— $ :

ee Specific éxc ‘aitiiie Pw en cantinptian *.

. of $40,000, less the aggregate of the amounts

claimed and allowed as specific exemption for

preceding calendar years. ~

= *- * . 7 _— . *

- Treasury Regulations 79 (1936 ed.) :

5 Arr. 9. Net gists. —The t tax is computed

upor the amount of the donor's net gifts

(see articles 5, 6, and 7). The term \*iet

gifts’ means the “total arnudunt of oifts’’

Me computed as provided in. sedtion 504 (\

> article 10), less the deduction: provided

-_ sevtion 505. (See articles 12 and 15.) ~

Ant. 11. Future interests in property.—-

: ‘No part of the value of a gift of a future in-

terest may be excluded in determining the

' total amount of*gifts sista during the-éal-

endar Year. ‘*Future interests’ is a legal

of gifts: (other than of future interests in -

a . SN nee ee eee

term, and includes reversions, remainders,

--and other interests*or estates, whether |

vested or contingent, and whether. or not

supported by ‘a particular interest..or es- ‘~

_ tate, which are limited to commence in use,

possession, or énjoyment at some future

ie ee te fe

STATEMENT °

‘The take, ee stipulated (R. 16-17, 36-38) and

found by the Tax Court (R. 39-40), are not in dis-

pute. They may be summarized as follows:

. By deed dated December 17, 1936, the taxpayer

pra Er a trust for the benefit of each of-his five

children, thrée of whom were then. minors. (R.

- 16-17.) Inauditing the taxpayer’ s gift tax return

) + for: the year 1936, the Conimissioner deter mined

aa taxpayer had made gifts in that year to

| ‘his wife and children in an aggregate amount of

$71,952.49. (R. 16-17.) )

Phe Commissioner allowed the taxpayer an ex-

clusion of $5,000 on each gift to his. five children

and ‘on the gift to his wife.’ The taxpayer's net

_ gifts for the year 1936, after deducting an exemp-

‘tion of $40,000, .were accordingly computed to be -

$1, 952.49, upon whieh’ a tax was duly assessed and.

‘ pee ae paid. (R. 17.)

| On March 21, 1937, the taxpayer augmented

the corpus of the trust by transferring to the

trustees 500 shares of stock having an aggregate

value of $25,000. (R. 17.) Upon receipt of this.

«> ‘gtoek the trustees allocated 100 shares, having a —

. oO . . : Fishy

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| an. 7

value of $5,000, to. each of the sinaiiar's s five

children, three.of whom were still minors. ~ (R.

1j.).. On December 9, 1938, the taxpayer created

‘another trust. for the benefit of each of his ‘five.

children, the corpus consisting of two tracts of

- land worth $38,581.54. .(R. 17.) When the 1938 .

trust was established, ‘two of the taxpayer's chil-

dren. were still minors.

The terms of. the two trusts were substantially

identical in their provisions for-each of the tax-.

payer’s minor children, ~The trust instrument of

December 17, 1936, provided, in part, as follows —

(R.18-23): | sc appa Td

Srconp: Terms of ‘the Trust: ‘Trustees

shall divide the pr incipal of ‘the trust irto

five equal shares -and shall hold,” manage,

invest and’ reinvest the principal of said

. shares in accordance with the powers here-

inafter granted, IN TRUST, NEVER-

THELESS, as follows: |

oie * - eae 1+ ®

3. As to the third of said equal shares of |

: principal, ‘to. accumulate the net income +”:

—~ therefrom for the benefit of WILLIAM ~ /

' _L. -DISSTON until he reaches the age ae

- twenty-one years, at which time to. pay over *—

to him all accumulated income, and there-

after to pay over: to.him ini not less than

quarterly instalments ‘the entire net’ in-

come derived. therefrom’ -during his life-

time; provided, however, that upon his —

reaching the.age of forty-five years one-half

of the principal of his share shall be paid

over to: him free and discharged of all

wales TF :

+ 4 aoe * * *

6. Trustees shall hold the shares of

minors in whom the principal shall have

vested during their respective -minorities,

~and during such’ time shall apply such

income theref rom as may be necessary for

-the education, comfort and support ‘of the

respective minors, and shall accumulate.

for each minor until he or she reaches

the ‘age of’ tweity-one years, all’ income

not so needed.’ The foregoing clause shall

apply to minor children of ‘the Settlor. ir-

respective of the direction heretofore set

forth to aceumulate all incotne for such

minors. In the ‘administration ‘of the.

shares of the minors, the Trustees shall

have all of the powers, duties and_discre-

tions, including the power of. investment

and reinvestment, as are conferred —

them as Trustees hereunder, y

o: a *: aay Bee

FourtH: Trustees’ Powers: *. * *

* * : * : * uk Sa eee

7. To ‘apply the ineome to which any

beneficiary shall ‘be entitled hereunder for

the maintenance, education and support of:

‘such beneficiary should he or she by’ reason

of age, illness. or any other ¢ eause in the

opinion of the T rustees. be incapable of.

dispensing “it. Payment by the Trustees

_ to'the parent of:any miner or to the person

with whom such minor residés and the —:

” RAS Aeterna fi

esa | ae en OF .

_ receipt of such parent or such person shall

* be sufficient acquittance and discharge to the

Trustees for such payment or payments.

. * : * ; * ; *

' Partial ‘payments of income from the 1936 -

trust were made to the. parent of the minor

_ beneficiaries in each of the years 1936, 1937, and

1938; ¢ (R. 36-38.) At the time the case was before

. the im Court there had been no net income from

the 1938 trust. (R: 38.) In 1937, checks repre-

senting trust income were sent by the corporate

~ trustee to the mother of the then mitiot bene-

- ficiaries, but she revurned them with instructions

to accumulate and hold the income until the chil-

. dren became of age. «(R. 37-38.) The third child

~ became of age April 12, 1938. (R. 36.). After

1937 the trust income for the fourth child ‘was:

accumulated until she became of age. (R. 38.)

Since 1937 the trust income for the youngest child

| has been accumulated. ‘(R. 38.)

ey | determining the taxpayer’s gift tax. for .

the year 1937, the Commissioner disallowed three

— $5,000 exclusions from taxpayer’s net gifts for

_ that year on the ground that the gifts to the three

minor children were gifts of future interests.

(R. 5-6:) For the year 1938,the Commissioner

disallowed two $5,000 exclusions from taxpayer’s.

net gifts for that year on the ground that the gifts.

~to- the-two-children-who-were still minors were

. gifts of future interests. (R. 13.)— ces .

634420—45

- The Tax Court: upheld the’ Commissioner’s de- —

terminations (R: 41), but its decision was re-

-. versed by the Circuit Court of Appeals for the

_. Third Circuit, sitting-en bane (R. 46-53). Judge

Biggs dissented. In its opinion the court below .

expressly overruled its prior decision in Commis-

. stoner V. Taylor, 122 F. 2d 714, certiorari denied,

314 U. S. 699. . | 3

net gifts ‘in prior years the Commissioner ad-

, justed the exclusions which had been allowed for

_ the gifts to the minor children in computing the

' taxpayer’s 1936 gift tax.. (R. 6.) _ At the time

this adjustment was made the year 1936 was closed

by the statute of limitations. (R. 41.)

_The Tax Court also upheld the Commissioner’s

determination in this respect.. (R. 41.) In view

of its conclusion regarding the principal question,

however, the court below did not pass on this .

‘q estion. The ‘dissenting opinion expressed the °

view that the Commigsioner’s: action was proper.

~ (R. 52-53.)

SPECIFICATION<OF ERRORS TO BE URGED

The Cireuit Court of- Appeals erred in holding ;

that the gifts to taxpayer’s minor children were

_ not gifts of future interests within the meaning of |

Section 504 (b) of the Revenue Act of 1932, and

~~ ir reversing the decision-of-the-Fax—Court.— — ;

SUMMARY OF ARGUMENT

- The ruling below rests upon the ground that

the gifts to the minor beneficiaries, like those to

the adults, were immediately’ vested, irrevocable,

definite, and not uncertain either as to the iden-

\ tity of the donees or the quantum of the gifts. The

recent decision of this Court in Fondren v: Com-

missioner. shows that the reliance « of the court be-

low upon these factors Was err oneous. » The gifts . -

here, as in the Fondren case, were limited to com-.

mence.in- enjoyment in the future, both as to -: -

principal and income, and hence were gifts of

_ “future: interests in property” within the mean-

ing of the statute and the applicable regulations, .

The gifts of principal under both trusts in this.

case are future, since none of the principal can

. be paid over before the beneficiaries reach 45, éx- ~

_¢ept on the earlier future contingencies of illness

or emergency. The income cannot be paid over

until the beneficiaries reach 21, except. for’ such

portions of the income estate as may be necessary ©

before then for their educ ation, comfoit and sup-

port. The limitations leave open the possibility”.

that the benefidiaries May not need or enjoy the

income of these trusts presently. |

So far ; as the trust instruments th msel¥es; are. *

~_-concerned, therefore, the gifts of isk come. are of —

‘future interests.” To permit, ‘an. inquiry into

the circumstances sirrounding the donatina, in oon

Oe soe ®

o i *

.10

order to dteicmtne whether the. eenetislactin had a —

- present need -which might be expected. to compel

the trustee to distribute all of the. trust income cur-

rently throughout the accumulation period, would

‘appear to. frustrate the evident expectation of

Congress-that. the term ‘‘future interests” would,

ithout more, seve as a work ‘kable criterion for —

p rome rg exclusions. 7 :

If; _ however, extrangous circumstances may

properly ‘he considered, such circumstanees in the °

present case do: not show the gifts of income to

be present interests. As to. the 1936 trust, there

is no showing that the income was presently

~ needed -by the beneficiaries when the trust was:

created ; indeed, the evidence is to the contrary.

If any part was presently needed, its value is un-

known. The gifts made under the 1936 trust in

1937 were undoubtedly future interests, for. none 3

- of the income was needed after the early part ‘of

1937. No present interests were given in the in-

* come of the 1937 trust, for that trust produced no

_ Income. “If a | present initerest was given, it had

. he value. —

A gift the enjoyment of which is. cilia is

a gift of a future interest, whether the- gift. is

-made to a. minor beneficiary and the postponemeiit —

‘is concurrent with his period of incompetence, or

whether. the gift is made to an adult. To treat

such a gift as a future interest in both of thes¢

.cire umistances does not. penalize gifts to minors,

| 11 : |

but aoe puts them upon the same Neti as gifts -

- to adults.. Nothing in the statute indicates’ that ae

Congress intended te treat them Stents.

The gift tax liability for 1937 and 1938 is de-

pendent upon the computation’ of a tax on the

aggregate sum of the net gifts for each of the

” preceding” ‘cilendar years. The-Tax Court cor-

rectly held that in determining the gift tax liabil-

ity for 1937 and 1938 the aggregate sum of the

net gifts for each pf the precedir lendar years

_ is to be correctly computed, even ‘though the tax.

paid hy the taxpayer in 1936 was hased. upon an

“erroneous determination of .the amount, of net

gifts in that year, and the tax hability for that =

year is now closed by the statute of limitations.

| ARGUMENT

I “

. THE INTERESTS GIVEN TO TRE MINOR BE NEFIC 1ARIES

ong WERE FU TURE INTERESTS |

The opinion in Fondren v. oieninniinson, de-

cided ‘on. January 29, 1945, rejects as erroneous

the process. of reasoning by: which the court below

- came to the conclusion that.the. gifts | to the minors .

-here. were gifts of present’ interests. The court

below found, contrary to ‘the conclusion of the

Tax Court, that the gifts te the minor chil-

dren were “‘immediate, definite, absolute, and ir-

s .

$=. ! ‘ ; °

“ }

_ + below proceeded, the-Zondren opinion ‘establishes ;

_ that the donor’s surrender of ownership and the

revocable.’ 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,” (R. 49.) In referring —

to 9 ‘the gifts as “immediate” the court. evidently

' mieant that the beneficiaries’ interests were

presently vested, for it held that despite the pro- —

vision for accumulation of income, “The gifts

were the property of the mirior donees none the -

less; and so was ‘the ineome which recurrently

accrued thereon even though it was to be ae-

cumulated during the donees’ minority.”” (R. 50.) .

It stated that “The surrender of ownership by the

donor of the subject matter of the gifts anid ‘the

investiture of the donees therewith was just as

__,eertain and ‘definite in the case of the minors as it

_ “was in the case of the ‘adults.’” “(R..51.) The

ecourt’s overruling of Commissioner ¥. Taylor, 122.

F, 2d 714 (C. C. A. 3d), certiorari denied, 314

U.S. 699 (R. 51), provides further proof that the

decision. below proceeds on a‘ basis wholly incon- —

. sistent with the rationale of the -Fondren decision,

for in the Taylor ease, as in Fondren, two bar-

riers steod between the time of the gift and its

enjoyment—the “sole discretion” of the. trustee --

and the need of the | ineome for education and

- Support. .

7 Contrary. to the premises from which the court

ieee S

investiture of the donees are irrelevant,’ for as Mr. -

Justice Rutledge, speaking for the Court, stated:

The question is of time, not. when title

vests, but when, enjoyment begins. —

And in so far as the opinion below relies upon the

fact thaf here the donees were known and the-

. quantum of the gifts was certain, its reliance is

. erroneous, for, as this Court held— —- ©

the crucial thing is postponement of enjoy-

ment, not the fact that the beneficiary is

specified and in esse or thatthe amount of.

the gift is definite and ‘certain. -

, The facts-of this ease do not differ in any ma-

terial respect from those 6f the Fondren case.

The cases are essentially alike, the differences _

being that here ‘the period for accumulating in-

‘come terminates when the beneficiaries reach 21

years of age instead. of 25, 30, and 35, and the

accumulated income is to be paid over at age 21,

not simultaneously with the distribution of the cor-

pus. (R.19-20,28-29.) Distribution of'a part of + —

» the corpus is to oecur when the beneficiary reaches

_In W isotakey v.. Cssinnialanan, 14 F. 2d 632, de sided

after the instant case. the court below.likewise regarded these

-factors.as irrelevant. There under the Group III trusts the :

accumulation of income was mandatory until the beneficiaries -

which he donor rparted Ww with, but that which the donee ~ .

became 21 years of age, andthe income accumulated i in that

time became part of the corpus, to be distributed at a future

date. In holding that the gift of the income was a future

interest, the court:said that the controlling interest is not that—

receives. Zhe 1<

— gehate sete -—,

eet

Ste x ;

45 years of age; es th other part will “hever be die- i;

- tributed to him but will pass to his descendants, <

' ‘either such descendants as he may appoint by

will or his aa generally, after his. death,

as will the entire corpus if he dies-before Peach- -

- ing 45. {R. 19-20, 28-29.) » The trustees here are .

authorized to expend. out of principal such sums as

théy may consider. ‘to’ be for-the best interests of\

‘the beneficiary, minor or otherwise, during Siens

or emergency, in no case to exceed. 10% of the -

particular -beneficiary’s share of the: principal.

(R. 23, 32:). The trusts require the trustees to ac-

cumulate the income until each of the beneficiaries

beeomes 21, but also provide that the trustees duri ing .

such timé (R. 21, 29-30)—

shall apply such income therefrom as as may

- be'necessary for the education, comfort and

support of the respective minors, and slrill —

-acctimulate for each minor until he, or she

_-reaches the age of twenty-one youts, alti in-

come not so needed. .

‘There is no recital here, as’ there ‘was in the

- Fondren trusts, that the beneficiaries are expected

to have other and adequate means of support. 364

Some of the trust income here was paid over for’

the minor beneficiaries in 1936 and 1937 (R. 36-38) ;

in 1937 the mother of the beneficiary returned |

some of the checks issued to her for income pay-

ments by the corporate trustee (R, 37-38). After.

1937 the. income © for the beneficiaries who eon-

5 tinued to be minors was accumulated during tne ‘ir

- x R ° : re m4 f

i We : ~ . Be fen - ; Pa

5 : y . ; ys * by , a eer

, . . _ . | : - .

15 gee

| tainority. (R. 38.) One of the 4wo trusti pro-

. duced no net income.’ (R. Gees’

We submit that the differences of fact between see

this case and the: Fondren case are without sig-

- nificanee, and do not call for a difference~in j

result. Lae

-’ Disregarding for the moinent the power ‘of the -

"tele to pay income over: for education, com-_

" fort and support, we think it immaterial that the ©

period of accumulation of income here. was to |

" termitiate at age 21 instead of age 25 and later, as

\. in the Fondren case. If all of-the income were

\to be accumulated. until the beneficiaries reach 21,

the income estate would unquestionably be a. fu-

_ ture interest even though the accumulations would

be concurrent with the minorities of the beneficiar- a

ies. With this conclusion the court below agrees.

Ww isotzke v. Commissioner, 144 F. 2d 632. By |

the same tyken the beneficiaries’ interests in the

trust principal are future interests, even as to the

. 10% of the pkincipal, which might be paid over

-, during illness orto meet an emergency, for these —

are contingencies Nef need in the future and fall

squarely “within the Fondren.- opinion. The —

trustees are required. to continue to hold half of

the principal until the heneficaries reach age 45,

and the other half ses their death, except

upon the earlier oc current a

* gene y—needs not existing mee

of ‘illness’ or emer-

1e time the gift took

16,

the gift of the income were held tobe a gift of «

present interést, the gift.of the corpus is one in

futuro. Fisher v. Commissioner, 132 F. 2d 383 |

(C. C. A. 9th) ; Sensenbrenner v. Commissioner, 134

F, 2d 833 (C. C. A. 7th). é

It is equally clear, we think, that the gift of tim

_— come to each of the minor beneficiaries is a gift of.

a future interest. Each trust. provides for ae-

cumulation of the net income and directs the .

trustees during the accumulation period to “apply

such inecorae therefrom as may be necessary for

_ the education, comfort and support”’ of the minor

' children, and to accumulate the balance. The gift

of income is unquestionaffy indefinite as to‘amount

_-and. time of ‘enjoyment. This factor. alone would

be. sufficient to establish the future character of |

the gift. Beyond that, however, we submit that

the trust instruments, themselves show that. they

were intended to be merely: reserves available in’

ease of necessity. They contain no positive diree- “* -

tion to the trustees to pay over the: income for

- the benefit of the minors, either periodically or . .

_ eurrently. The trust ins¢ruments contain, we be-

—_ an -implicit recognition that other ifunds, =

* might be primarily available for the education and

support of the minor. children. It is not Foctui

tous, of course, whether the children will be sups

‘ported and edueated out of same funds, but ‘it is

fertuitous, so far as the trust instruments are

coticerned, whether the income -from these trusts

will be ‘:sed. for such purpose. The vesting in the

_°

trustees of the power to pay over or accumu-

late the jneome shows, that the grantor himself

could not predict what the need would de; he left

that for the trustees to determine from. time. to

‘time. according to future ‘circumstances. The

_. power given to the trustees assumes also that the

trustees shall make the initial judgn t, both as

2 to the need of the beneficiaries and ‘amount of |

‘trust income required to satisfy ‘that need. In _

the exercise of that judgment trustees are re- ©

- quired only to act reasonably,‘and if they should...

. ‘reasonably determine that none of the income or

only a- part of it was needed, they could not be

~~ eompelied “to make distribution. The enjoymetit

of the gift by the beneficiaries is thus dependent, ~

_ under any trust like the present one, upon the

__ need of the beneficiaries for the income for their

_ edueation, comfort and support; Japon - the con- |

‘ tinuance of that need throughout the period when -

"the ineome is directed to be ace nmulated, upon

the availability of other funds; and, to a_sub-

stantial degree and as’ to all these matters, upon

the trustees’ exercise of judgment. These eondi-

tions upon ‘which ,the: enjoyment of the gift. is -

dependent are to ocenr in the future ; ‘if not, the

~ deed would contain no provisiol for accumulating

- the ineome., |

——

An interest whose enjoyment is dependent upon

such future contingencies is, we believe, a future

interest. It is not an interest “ited to com-

mence” in enjoyment at the time the gift is made.

. .

. te Ss 4 ‘

eye ee ee

J f ‘

of jaa | eee 18

- Cf, Treasury Regulations 79, Article 11, supra,

pp. 34. So far as: the beneficiary receives present -

enjoyment « of any part of the income, he does not -

. do so because the enjoyment is “‘limited to com- _

mence*’ at present, but because of circumstances

_ dehors ‘the li jitations in the trust” instruments,

-which show a heed ‘so compelling as to require dis- >

= Moreover, we do not think it can be said that

théneed here’ was.. presently existing when the |

gift wasimade, and therefore that the gift of in-

> come was a pregent gift. Presently existing need. —

- eannot he presuméed-in. the face of the grantor’s

_- direetion to accumulate. ‘the income, If there was.

‘such a need, that fact must be’ proved by’ ex-.

trinsic evidence showing, inter alia, the benefi-

_ciaries’ station in life and how much they re-

_. quire for their “‘comfort”’,-what likelihood there is:

that the parents will continue to support the

_ °. beneficiaries from resourees outside the gift, what

__ other property the beneficiaries may have avail-.

_ ‘able either by reason of other gifts or bequests or

_- other donations to the same trust in earlier years, :

whether the trustees’ are likely to be liberal oer

ve stringent. in their application of the trust iticonie,

* . + and what: likelihood there is that: the need. existing

~~ when the trust is ereated will coritinue throughout ot

the accumulation period... ‘Even when sucha « §

_ showing is made, unless it is proved that all of ~

| the income will in rensenatle certainty be paid

-19

‘over as it acerwes, it still is. necessary to value—

the present <, of the donee. Some part of

his interest,: at least, is limited to commence in,

enjoyment jn the future, and before the exclusion

may be allowed with respect to any portion of the

vift the present interest must be evaluated. See .

the -opinion of Judge Biggs dissenting below.

(R.°52-53:) The exclusions here involved, are no pa

different from any other exemptions in the re- -

quirement that the taxpayer must prove the facts

is ‘him to the ex emption which he claims,

Cf. Néew Colonial Co. v. Helvering, 292 U. S. 435.

The interests here do not become present interests |

simply because the income might all be paid over —

to the beneficiaries eurrently and the accumulated

’ income might, if necessary, be entirely exhausted. sate

See IV isotzkey ve ‘Commissioner, 144 F. 2d 632,

637. Such reasoning ignores the fact that some

part of the gift is limited to commence in ‘posses-

_ sion. or enjoyment: in the. future. [t ignores also_

the burden i incumbent upon the taxpayer to preve = ¢ .: 4

that the interest in: question is an interest with |

respect to which the exclusion is allowable.

Tn considering whether such —an inquiry into.

circumstances dehors the trust may be availed of to

‘show tliat the donee’s interest is not a future inter-

est, it must be emphasized that Congress was in °

“search of a workable rule. The use of the term “2

¢ “future interests’? was adopted. as a means of elim-

inating problems of determining the eve mtual tak- eg

, . 5 fe °

.. on the question whether. circumstances surrounding the -ea-

ers of the gift. and the value of their. interests,

See United States v. Pelzer, 312 U.S. 399, 403; H.

Rep. No. 708, 72d Cong., Ist Sess:, p. 29 (1939-1

Cum. Bull. (Part 2) 457). It was not the Con- -

gressional intent, in making use of that term, to -

subject to litigation every gift made to a trust like

the one here involved.* “We believe that interests

which might be enjoyed only in the future, from

all that appears on the face of ‘the trust instru-

ment, are future interests within the meaning .of -

the statute. : Such a decision would be desirable

* The question ads ‘never be finally determined with re-

‘spect to any trust of the present kind. The inconte from the

. original gift i in trust might be found to be no more than suf-

ficient to meet the beneficiary’s need. But with ‘eaclr subse-

quent gift augmenting thie trust estate, the question arises

again. The present case, like the Fondren case, illustrates the

. tendency of donors to make gifts of less than $5,000 froni

year to year t» the same trusts and the same donees to derive

-the fall advantage of the annual exclusion.

We know of no Congressional policy requiring broad ap-

plication of the exclusion; it is retained in the statute gnly

because administrative difficulties prohibit its abolition. See

- H. Rep: No. 2333, 77th Cong., 2d .Sess., p. 387 (1942-2 Cum.

“Bull. 372), relating to the Revenue Act of 1942 in whic h the

exclusion was reduced to $2,000:

“Since this is an annual exclusion (not exhaustible as is the

specific: exemption ) and is not limited to any number of

donees, it is possible to distribute propert y of large aggregate

value over a period of years, free not only of. gift tax but-of—«

estate tax-as well. W hile administrative difficulties prevent

” ‘the abolition of the exclusion, your committee recommend

: that it be reduced to $3,000." ”

_ §Circuit.Céurt of Appeals decisions appear to be in conflict

tion of the trust may be considered: Thus Smith vo Comin’

: 21 : ty ; a

* for the avoidance of litigation. However, if the

question is to be determined from the circum-

stances surrounding each particular gift, we submit

_that the cireumstances here.do not show the gifts at _

bar to be gifts of present interests, and that no

exclusions are allowable.

We think ‘that no particular significance is.to be |

attached to the fact that the trust instruments here

+. the heneficiaries will have other and adequate means

of support, or that the trustees under the 1936 trust _

paid over some of the income to the mother of the

minor beneficiaries in 1936 and part of 1937. The és

absence of the recital merely leaves the record

lacking. in proof as to the beneficiaries’ need for

_ the income. The payments which were -made

under. _the 1936 trust. hardly establish that there

was a need so great as to compel distribution.

The payments at best are equivocaf-évidence: of

need, since some of thé checks given by thé cor-

porate trustee in 1937 were returned by the bene-

ficiaries’ mother, presumably because they were

‘not needed. Certainly, so far as the beneficiaries |

' did enjoy part of the income estate, they did-so not.

because that estate as limited was a present one,

but because of the circumstance that the trustees ex:

~ ercised their’ judgment in the beneficiaries’ favor

. sioner, 131 F. 2d 254 (C. C. A. 8th), which turned upon such —

an inquiry has been said to rest upon “an- unsecure founda-

tion.” Fisher v. Cominissioner, 132 F.2d 383, 386 (C. C. A.

Mi). Pe acid ; 4

oO : ‘ ; 5 : 22

even though .they were “not compelled to do so,

But the nature ofthe interest .of the beneficiaries

is determined as of the date of the ‘gift, Abt by

what the trustee may subsequently choose to do

in the exercise of the powers given to him. Chm-

missioner V. Gardner, 127° F. 2d 929, 931 (Cc, C.. JA: :

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

61 (C. C C. A: Ist). Throughout the remainder of

the beneficiaries’ minorities until the time of trial ;

the income was accumulated, thus demonstrating

that the right to enjoy so much of the income, at

least, was dependent upon a contingency of need

in the future, and was not a present interest.. The »

present record does not show that any of the in-

cone of the 19536 trust was-a present interest.

Moreover, with respect to the 1936. trust, gitts

were made in different years; first, when the trust

was created in 1936, and, second, i in March of 1937

when further securities were transferred in a-

value of $5,000 for each beneficiary. (R. 16-17.)

Both donations are involved here, the first in de-

termining the amount of the taxpayer ’s net gifts -

for years prior te the tax year (see point IE

infra, pp. 23-25), and the second. in determining

the net gift made in the tax year. Even if it were

to be held, contrary to our contention, that the first

donation yas made in stich ¢ircumstanees of need

that the interests were present, nevertheless the

second donation clearly was liot made under-such .

> 23 . F «

circumstances. The record shows that no income

- was needed by the beneficiaries after the early part

of 1937. (R. 37-38.) —

"Under the 1938 trust no income - been pro-

duced prior to. the hearing below, nor “did the

grantor expect that any: income ‘would be produced,

the’ corpus consisting whclly of entirely anim-

proved real estate. (R. 38.) We submit that the |

beneficiaries took no: present’ interest in the non-

"existent income from-that gift. Certainly any

present interest which they may have taken in the

‘income estate had no. value. And their interests

in the corpus were clearly futuré interests. The

‘corpus was to be/keld by the trustees until the

benefici ‘laries reached 45; then only part of it would

be paid over. (R. 18-21, 27-29.) ‘The corpus

could be invaded to a limited extent only, me.

only during | illness or emergency. .

We submit, therefore that no exclusion i is allow-

able with penpect to either trust. o

THE STATUTE OF LIMITATIONS DOES NOT PRECLUDE THE

CORRECT DETERMINATION OF THE AMOUNT OF NET

GIFTS MADE BY THE TAXPAYER IN PRIOR YEARS, FOR

THE PURPOSE OF DEFERMINING .THE CORRECT ‘TAX ~

LIABILITY FOR THE CURRENT YEARS —

<a The gift tax for each*calendar vear is thee EXCESS

of a tax, prope ‘rly computed, on the aggregate of |

net rifts made in the tax year and in each prec “od-

”

ing calendar vear over a tax, properly computed,

on the aggregate of net gifts made in preceding

calendar ~— Revenue Act of 1932, Section 502,

supra, p. 2. The taxpayer maintained in the Tax

_ Court that since the statute of. limitations had

“run against the year 1936, the ¢ ‘ommissioner could

not make a new,. correct determination of the net

gifts made in 1936 for the purpose of computing

the tax for 1937 and 1938. The Tax Court re-.

jeeted the contention. (R. 41) and the Cireuit

Court of* Appeals did. not reach the question,

although Judge Biggs in his dissenting opinion

stated that the Tax Court’s ruling on this —

was correct (R. 24), ;

The statute‘ precludes nascent: or a pre- | |

“ceeding: in court without assessment for the col-

lection of taxes after three years after the: return

was filed. Hence: the tax liability fer 1936. is

closed. But the statute does not purport to

_ preclude an examination into events ‘of pric?

-years for the purpose of correctly deterinining the _

gift tax liability for years which are: still open. ,

‘ Revenue Act of 1932: er

Sec. 517. Periop OF LIMITATION UPON ASAESSME NT AND COL-

LECTION.

(a) General Rule — xcept as prov ided in subsection (b).

the amount of taxes'imposed by. this title shall be asse sed

withiti three years affer the return|was filed, and no proceed:

ing in court without ‘assessment for the coliection of ‘such

- taxes shall be begun after the expiratiot of three years after

the return was filed.

:@. . € a ; *

This view is supported by.the pertinent Treasury

Regulations * and has been uniformly applied by

the Tax Court. W interbotham v. Commissconer,

45 B. T. A, 972; Roberts.v. Cominissioner, 2 T. C.

679, affirmed on another issue, 143 F. 2d 657 (C.

Cc. A, Sth), certiorari denied, ‘February ‘5, 1045;

Ww allersteim Vv. Commissioner, 2 T. Cy. 542. The

situation is analogous to that involved in C OM is-

made in 1938 of the taxpayer’s books. disclosed an

erroneous valuation of its inventory of June 30, .

1935. Because of this error the taxpayer hed —

overpaid its income taxey for 1935, and the ex-

‘cess payment was not subject to refund. because

barred: by. the statute of limitations. On the. basis

_ot the adjusted inventory, however, the Com-

missioner: determined that there: was 2 tax de-

ticieney for 1936. This Court confirmed the action

_of the Board of Tax Appeals in sustaining: the

Commissioner’s determination, holding: that the

Board had’ power to redetermine the 1936 de-.

ficiency distinct from any overpayment or under-

payment in ally prior. or subsequent me

Treasury. a ee 79, Article 5:

rach of the preceding calendar years” (aside from the amount,

of the specific exemption deductible) is meant the true and

cornet aggregate of such net gifts, not necessarily that re-_

tarned for such years and in respect, to which tax was ¢

om: ss . ; :

_ CONCLUSION

We submit that the decision of the Tax Court

was correct, and that the decision of the Circuit:

Court of Appeals should be reversed.

Respectfully ‘submitted. |

CHARLES Fahy, |

Solicitor General.

.. SAMUEL O. CLarK, Jr., :

+ Assistant Attorney General..

- Sewau, Key,

_J. Lovis Monarca, .

: Ropsert Koerner, -

Spe cial Assistants to the Attorney Gene ral.

Marcu 1945.

A ee

tren 7

nts

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