Commissioner of Internal Revenue v. Disston

• Decision Date: 04 June 1945
• Docket Number: No. 589,589
• Citation: 158 A.L.R. 166,325 U.S. 442,89 L.Ed. 1720,65 S.Ct. 1328
• Parties: COMMISSIONER OF INTERNAL REVENUE v. DISSTON
• Court: U.S. Supreme Court

325 U.S. 442

65 S.Ct. 1328

89 L.Ed. 1720

COMMISSIONER OF INTERNAL REVENUE

v DISSTON.

No. 589.

Argued April 24, 1945.

Decided June 4, 1945

Mr. J. Louis Monarch, of Washington, D.C., for petitioner.

Mr. Harold Evans, of Philadelphia, Pa., for respondent.

Mr. Justice RUTLEDGE delivered the opinion of the Court.

This case, like Fondren v. Commissioner, 324 U.S. 18, 65 S.Ct. 499, presents questions whether certain gifts to minors are gifts of 'future interests in property,' within the eaning of the Revenue Act of 1932, c. 209, 47 Stat. 169.

In 1936 the respondent, William D. Disston, created a trust for the benefit of each of his five children, three of whom were then minors. The total of his gifts that year was $71,952. The Commissioner allowed an exemption of $5000 on each gift for the children and on one to his wife. The taxpayer also was allowed the specific exemption of $40,000 provided by § 505 of the Revenue Act of 1932, as amended by § 301(b) of the Revenue Act of 1935, 26 U.S.C.A.Int.Rev.Acts, page 586. The net gifts for 1936 accordingly were computed to be $1952, upon which a tax was assessed and paid.

In 1937 the taxpayer added to the corpus of the trust securities valued at $25,000, of which $5000 was allocated to each child's interest, including the three who were still minors. In 1938 he created another trust for his five children, the corpus consisting of undeveloped land worth $38,581. Two of the children still were minors.

The two trusts were identical in all respects now material. The principal was divided into five equal shares, one for each child. The trusts were of the spendthrift variety. All shares of the corpus and income were to be free from 'anticipation, assignment, pledge, or obligations of beneficiaries,' as well as execution or attachment. The shares of the minors alone are now involved. Hence the nature of the trust as applicable to them only need be considered.

The taxpayer's son, William L. Disston, was nineteen in 1936 when the first trust was created. As to his share the trustees were directed, in the Second Article, 'to accumulate the net income therefrom for the benefit of William L. Disston until he reaches the age of twenty-one years, at which time to pay over to him all accumulated income and thereafter to pay over to him in not less than quarterly instalments the entire net income derived therefrom during his lifetime; 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 trusts; and upon further trust upon his death whether before or after reaching the age of forty-five years, to divide the principal of his share, or such portion thereof as is then held by the Trustees, among his then living descendants * * * in such amounts as he shall by will appoint, and in default of such appointment, to divide the same equally per stirpes,' with provision for division among the taxpayer's other children and their descendants if no descendant of the beneficiary should then be living. The Article contains a proviso that if the taxpayer's son should die before reaching forty-five, the son may appoint to his spouse for a period no longer than her life not more than one-half of the income from his share of the corpus.

Identical provisions were made for the two minor daughters, except that they were to obtain only one-third of the corpus at age forty-five and could appoint to their spouses only one-third of the income.

A subsequent paragraph provided that the trustees should hold the minors' shares during their respective minorities, 'and during such time shall apply such income therefrom 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 twenty-one years, all income not so needed. The foregoing clause shall apply to minor children of the Settlor irrespective of the direction heretofore set forth to accumulate all income for such minors.'

In addition the Fourth Article, which defined the trustees' powers, authorized them '(t)o apply the income 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 cause in the opinion of the Trustees be incapable of dispensing it. Payment by the Trustees to the parent of any minor * * * shall be sufficient acquittance and discharge to the Trustees for such payment or payments.'

Finally, the trustees were authorized to invade the corpus in an emergency: 'To expend out of the share of principal from which any beneficiary may be receiving income under this deed of trust such sums as Trustees may consider to be for the best interests of such beneficiaries during illness or emergency of any kind; provided, however, that in no case shall such expenditures of principal exceed in the aggregate ten percent (10%) of the value of such share of principal. * * *'

In operation the 1938 trust of unimproved realty had produced no net income to the time the case came before the Tax Court. Most of the 1936 income of the first trust, $288 for each minor, was paid to the mother of the beneficiaries. In 1937 partial payments of income, $94 per minor child, were made. The beneficiaries' mother returned other checks to the corporate trustee in 1937, and one of the individual trustees, an adult child of the taxpayer, directed the corporate trustee thereafter to accumulate the income of the minors. No further payments of income were made to any child prior to his becoming of age.

In determining the taxpayer's gift tax for 1937 the Commissioner disallowed three $5000 exclusions from the net gifts for that year on the ground that the gifts to the three minor children were gifts of future interests. For 1938 the Commissioner disallowed two $5000 exclusions on the ground that the gifts made that year to the two children who were still minors were gifts of future interests.

In computing the gift tax for 1937 and 1938 it was necessary for the Commissioner to compute the aggregate sum of the net gifts for the preceding years.¹ The Commissioner, in determining the net gifts made for this purpose by the 1936 trust, adjusted the exclusions which he had allowed in 1936 to the extent of $5000 for each of the three minors. The period of limitations for assessment and collection of 1936 gift taxes had run.²

The Tax Court upheld the Commissioner, but the Court of Appeals reversed, holding no future interests arose as a result of the gifts to the minors. Consequently if was unnecessary for the Court of Appeals to consider whether the statute of limitations barred readjustment of the net gift figure for 1936 or simply barred collection of any further gift taxes for that year.

The guiding principles were outlined recently in Fondren v. Commissioner, 324 U.S. 18, 65 S.Ct. 499. Gifts of 'future interests,' within the meaning of § 504(b), 26 U.S.C.A.Int.Rev.Acts, page 585, to any person are not excluded from the computation of net gifts to the extent of the first $5000 in value, as are present interests. Treasury Regulations 79 (1936 ed.), Article 11, defines 'future...