Cristofani v. Comm'r of Internal Revenue (In re Estate of Cristofani)

• Decision Date: 29 July 1991
• Docket Number: Docket No. 28538-89.
• Citation: 97 T.C. No. 5,97 T.C. 74
• Parties: ESTATE OF MARIA CRISTOFANI, DECEASED, FRANK CRISTOFANI, EXECUTOR, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

97 T.C. 74

97 T.C. No. 5

ESTATE OF MARIA CRISTOFANI, DECEASED, FRANK CRISTOFANI, EXECUTOR, Petitioner

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 28538-89.

United States Tax Court

Filed July 29, 1991.

D created an irrevocable inter vivos trust to which she contributed property during each of the two years preceding her death. The value of each contribution was $70,000. The primary beneficiaries of the trust were D's two children. D's five minor grandchildren had contingent remainder interests in the trust. In addition, the trust provided that D's two children and five grandchildren each had the unrestricted right to withdraw an amount not to exceed the amount of annual gift tax exclusion under sec. 2503(b) ¹ ($10,000), within 15 days following each of D's contributions to the trust. R determined that D was not entitled to gift tax exclusions for transfers benefiting D's grandchildren on the grounds that they did not receive a “present interest” in property as required by sec. 2503(b).

HELD: The unrestricted right of withdrawal given to each of D's grandchildren was a present interest in trust corpus. Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), revg. on this issue T.C. Memo. 1966-144, followed. D was entitled to gift tax exclusions of $10,000 for each of her five grandchildren as a result of her contributions to the trust. Owen G. Fiore and Mark R. Shepherd, for the petitioner.

Elizabeth D. Rawlins, for the respondent.

RUWE, JUDGE:

Respondent determined a deficiency in petitioner's Federal estate tax in the amount of $49,486. The sole issue for decision is whether transfers of property to a trust, where the beneficiaries possessed the right to withdraw an amount not in excess of the section 2503(b) exclusion within 15 days of such transfers, constitute gifts of a present interest in property within the meaning of section 2503(b).

FINDINGS OF FACT

Petitioner is the Estate of Maria Cristofani, deceased, Frank Cristofani, executor. Maria Cristofani (decedent) died testate on December 16, 1985. At the time of her death, decedent resided in the State of California. Petitioner's Federal estate tax return (Form 706) was timely filed with the Internal Revenue Service Center in Fresno, California, on September 16, 1986.

Decedent has two children, Frank Cristofani and Lillian Dawson. Decedent's children were both born on July 9, 1948. They were in good health during the years 1984 and 1985.

Decedent has five grandchildren. Two of decedent's five grandchildren are Frank Cristofani's children. They are Anthony Cristofani, born July 16, 1975, and Loris Cristofani, born November 30, 1978. Decedent's three remaining grandchildren are Lillian Dawson's children. They are Justin Dawson, born December 1, 1972, Daniel Dawson, born August 9, 1974, and Luke Dawson, born November 14, 1981. During 1984 and 1985, the parents of decedent's grandchildren were the legal guardians of the person of their respective minor children. There were no independently appointed guardians of decedent's grandchildren's property.

On June 11, 1984, decedent executed a durable power of attorney which named her two children, Frank Cristofani and Lillian Dawson, as her Attorneys in Fact. On that same day, decedent executed her will.

On June 12, 1984, decedent executed an irrevocable trust entitled the Maria Cristofani Children's Trust I (Children's Trust). Frank Cristofani and Lillian Dawson were named the trustees of the Children's Trust.

In general, Frank Cristofani and Lillian Dawson possessed the following rights and interests in the Children's Trust corpus and income. Under Article Twelfth, following a contribution to the Children's Trust, Frank Cristofani and Lillian Dawson could each withdraw an amount not to exceed the amount specified for the gift tax exclusion under section 2503(b). Such withdrawal period would begin on the date of the contribution and end on the 15th day following such contribution. Under Article Third, Frank Cristofani and Lillian Dawson were to receive equally the entire net income of the trust quarter-annually, or at more frequent intervals. After decedent's death, under Article Third, the Trust Estate was to be divided into as many equal shares as there were children of decedent then living or children of decedent then deceased but leaving issue. Both Frank Cristofani and Lillian Dawson survived decedent, and thus the Children's Trust was divided into two equal trusts. Under Article Third, if a child of decedent survived decedent by 120 days, that child's trust would be distributed to the child. Both Frank Cristofani and Lillian Dawson survived decedent by 120 days, and their respective trusts were distributed upon the expiration of the 120-day waiting period. During the waiting period, Frank Cristofani and Lillian Dawson received the entire net income of the separate trusts as provided for in Article Third.

In general, decedent's five grandchildren possessed the following rights and interests in the Children's Trust. Under Article Twelfth, during a 15-day period following a contribution to the Children's Trust, each of the grandchildren possessed the same right of withdrawal as described above regarding the withdrawal rights of Frank Cristofani and Lillian Dawson. Under Article Twelfth, the trustee of the Children's Trust was required to notify the beneficiaries of the trust each time a contribution was received. Under Article Third, had either Frank Cristofani or Lillian Dawson predeceased decedent or failed to survive decedent by 120 days, his or her equal portion of decedent's Children's Trust would have passed in trust to his or her children (decedent's grandchildren).

Under Article Third, the trustees, in their discretion, could apply as much of the principal of the Children's Trust as necessary for the proper support, health, maintenance and education of decedent's children. In exercising their discretion, the trustees were to take into account several factors, including “The Settlor's desire to consider the Settlor's children as primary beneficiaries and the other beneficiaries of secondary importance.”

Decedent intended to fund the corpus of the Children's Trust with 100 percent ownership of improved real property, on which a warehouse was located, identified as the 2851 Spring Street, Redwood City, California, property (Spring Street property). Decedent intended that a one-third undivided interest in the Spring Street property be transferred to the Children's Trust during each of the 3 taxable years 1984, 1985, and 1986. The Spring Street property was unencumbered property at all times pertinent to this case.

Consistent with her intent, decedent transferred, on December 17, 1984, an undivided 33-percent interest in the Spring Street property to the Children's Trust by a quitclaim deed. Similarly, in 1985, decedent transferred a second undivided 33-percent interest in the Spring Street property to the Children's Trust by a quitclaim deed which was recorded on November 27, 1985. Decedent intended to transfer her remaining undivided interest in the Spring Street property to the Children's Trust in 1986. However, decedent died prior to making the transfer, and her remaining interest in the Spring Street property remained in her estate.

The value of the 33-percent undivided interest in the Spring Street property that decedent transferred in 1984 was $70,000. The value of the 33-percent undivided interest in the Spring Street property that decedent transferred in 1985 also was $70,000.

Decedent did not report the two $70,000 transfers on Federal gift tax returns. Rather, decedent claimed seven annual exclusions of $10,000 each under section 2503(b) for each year 1984 and 1985. These annual exclusions were claimed with respect to decedent's two children and decedent's five grandchildren.

There was no agreement or understanding between decedent, the trustees, and the beneficiaries that decedent's grandchildren would not exercise their withdrawal rights following a contribution to the Children's Trust. None of decedent's five grandchildren exercised their rights to withdraw under Article Twelfth of the Children's Trust during either 1984 or 1985. None of decedent's five grandchildren received a distribution from the Children's Trust during either 1984 or 1985.

Respondent allowed petitioner to claim the annual exclusions with respect to decedent's two children. However, respondent disallowed the $10,000 annual exclusions claimed with respect to each of decedent's grandchildren claimed for the years 1984 and 1985. Respondent determined that the annual exclusions that decedent claimed with respect to her five grandchildren for the 1984 and 1985 transfers, of the Spring Street property, were not transfers of present interests in property. Accordingly, respondent increased petitioner's adjusted taxable gifts in the amount of $100,000.

OPINION

Section 2001(a) imposes a tax on the transfer of the taxable estate of every decedent who is a citizen or resident of the United States. The tax imposed is equal to the excess of the tentative taxon the sum of the amount of the taxable estate and the amount of adjusted taxable gifts, over the amount of tax which would have been payable as a gift tax with respect to gifts made by a decedent after December 31, 1976. Sec. 2001(b). The term “adjusted taxable gifts” means the total amount of taxable gifts (within the meaning of section 2503) made by a decedent after December 31, 1976, other than gifts which are includable in the gross estate of the decedent. Sec. 2001(b). Section 2503(a) defines “taxable gifts” as the total amount of gifts made during the calendar year, less certain statutory deductions.

Section 2503(b) provides that the first $10,000 of gifts to any person during a calendar year shall not be included in the total amount of gifts made during such year. A trust beneficiary is considered the donee of a gift in trust for purposes of...