Fondren v. Commissioner

McCORD, Circuit Judge. The appeal involves gift taxes for the calendar year 1937, and .is taken in two cases which by agreement were consolidated and tried together. Question: Are gifts of stock in augmentation of seven irrevocable trusts, gifts of future interests to which $5,000 exclusions as to each are allowable under Section 504(b) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 585? Pertinent facts: During 1935, 1936 and 1937 taxpayer and her husband executed a separate trust instrument in favor of each of seven grandchildren, each being below the age of six years at the time the trust was created. On December 2, 1937 taxpayer and her husband each made a gift to each trust of 100 shares of Humble Oil & Refining Company stock of the value of $59.75 a share, the fair market value of each of the 100 share gifts being $5,-975. On their gift tax returns for 1937 taxpayer and her husband each claimed the statutory exclusion of $5,000 for each of their seven gifts, reported a taxable gift for each trust of $975, and paid gift taxes on this basis. The trust instruments were substantially the same, the principal variation being with respect to the successor beneficiaries in the event of the death of either of the principal beneficiaries. All the beneficiaries were living when this proceeding was heard. The trusts were absolute and irrevocable, with no interest in the estate retained by the grantors. The grantors reserved the right to remove any active trustee except W. W. Fondren, and to name a successor trustee with the same rights, powers and authorities as the first trustee, a right which was also reserved to the survivor of the grantors. Each trust instrument provided that taxpayer and her husband might transfer, assign and deliver additional property to the trustee for the benefit of the beneficiary. [420] The stated purpose in creating each trust was to provide for the personal comfort, support, maintenance and welfare of each grandchild. The trust was to continue until each grandchild attained the age of 35, but twenty-five per cent of the corpus and accumulations, if any, were to be delivered to the grandchild when he or she attained the age of 25; thirty-three and one-third per cent (33%%) when he or she attained the age of 30; and the remainder when he or she attained the age of 35. If the beneficiary died leaving issue before termination of the trust, the estate was to be held and administered for the benefit of the issue and delivered when the youngest of such issue attained the age of 21. If the beneficiary died without issue before termination of the trust, successor beneficiaries were provided for by the trust instruments. The trust funds were not to be liable for obligations of the beneficiary. A beneficiary could not anticipate his or her interest in the trust fund created, and such funds could not be reached by judgment creditors or others having claims against the beneficiary. The trustee was given full power and authority with respect to the management and control of trust funds. He could sell, mortgage, or pledge any or all of the trust funds, and could institute or defend suits or legal proceedings necessary in his judgment for the protection or enforcement of the interest of the trust estate. This power was to be in no wise diminished during the life of the trust. W. W. Fondren was named trustee of each trust instrument. He died on January 5, 1939, and taxpayer, Ella F. Fondren, his wife, succeeded to the trusteeship. At all times subsequent to the creation of the trust, the parents of the named beneficiaries have adequately and sufficiently provided for the support, maintenance and education of the children named in the trust. As a result, no part of the trust income or corpus has'been distributed, used or applied for the benefit, support, maintenance or education of any one of the beneficiaries of the seven trusts. The Tax Court found that the gifts of stock made by taxpayer and her husband in 1937 to the trust estates were gifts of future interests as to which exclusions were not allowable in determining their gift tax liability for that year. The cases as consolidated are before us for review. Decision must turn on that part of Article 3 of the trust instruments, which is as follows: “Out of the trust estate hereby created and as the - same may hereafter be augmented and increased by gift from the Grantors, or either of them as herein provided for, or from 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 for the purpose if it be sufficient. If it be necessary to use any of the corpus of the estate for that purpose and in the judgment of 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 said 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 properly provide for his education, maintenance and support; and, if the income from the trust estate be not needed for 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 Grandson shall be properly maintained, 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 augmentations thereof, it shall be the duty of the Trustee to see that this obligation shall be properly and reasonably discharged. * * * ” Treasury Regulations 79 (1939 Ed.) Article 11, defines future interests and has been quoted with approval by our court of last resort: “ ‘Future interests’ is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time * * So that, we find the answer to our question : When Article 3 of the trust instru [421] ment is measured by decision it becomes patent that the trust gifts here in question were gifts of future interests and the seven exclusions in question are clearly not allowable. United States v. Pelzer, 312 U.S. 399, 61 S.Ct. 659, 85 L.Ed. 913; Ryerson v. United States, 312 U.S. 405, 61 S.Ct. 656, 85 L.Ed. 917; Fisher v. Commissioner of Internal Revenue, 9 Cir., 132 F.2d 383; Commissioner of Internal Revenue v. Wells, 6 Cir., 132 F.2d 405; Sensenbrenner v. Commissioner of Internal Revenue, 7 Cir., 134 F.2d 883; Commissioner of Internal Revenue v. Phillips’ Estate, 5 Cir., 126 F.2d 851. The decision of the Tax Court is affirmed.