Crummey v. CIR, No. 21607

• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)
• Writing for the Court: BROWNING and DUNIWAY, Circuit , and BYRNE
• Citation: 397 F.2d 82
• Docket Number: No. 21607
• Decision Date: 25 June 1968
• Parties: D. Clifford CRUMMEY et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

397 F.2d 82 (1968)

D. Clifford CRUMMEY et al., Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent.

Nos. 21607, 21607-A.

United States Court of Appeals Ninth Circuit.

June 25, 1968.

Wareham C. Seaman (argued), Alvin R. Wohl, John B. Cinnamon, of Seaman, Couper & Wohl, Sacramento, Cal., for appellant.

Stuart A. Smith (argued), Meyer Rothwacks, David O. Walter, Attys., Dept. of Justice, Harry Marselli, Atty., Tax Division, Dept. of Justice, Mitchell Rogovin, Asst. Atty. Gen., Tax Division, Richard C. Pugh, Acting Asst. Atty. Gen., Lester Uretz, Chief Counsel, Internal Revenue Service, Washington, D. C., for appellees.

Before BROWNING and DUNIWAY, Circuit Judges, and BYRNE^*, District Judge.

BYRNE, District Judge:

This case involves cross petitions for review of decisions of the Tax Court of the United States. Jurisdiction in the Tax Court was based upon 26 U.S.C. § 7442. Jurisdiction in this court is based upon 26 U.S.C. §§ 7482 and 7483.

On February 12, 1962, the petitioners executed, as grantors, an irrevocable living trust for the benefit of their four children. The beneficiaries and their ages at relevant times are as follows:

 Age 12/31/62 12/31/63
                 John Knowles Crummey 22 23
                 Janet Sheldon Crummey 20 21
                 David Clarke Crummey 15 16
                 Mark Clifford Crummey 11 12
                

Originally the sum of $50 was contributed to the trust. Thereafter, additional contributions were made by each of the petitioners in the following

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amounts and on the following dates

 $ 4,267.77 6/20/62
                 49,550.00 12/15/62
                 12,797.81 12/19/63
                

The dispute revolves around the tax years of 1962 and 1963. Each of the petitioners filed a gift tax return for each year. Each petitioner claimed a $3,000 per beneficiary tax exclusion under the provisions of 26 U.S.C. § 2503(b). The total claimed exclusions were as follows:

 D. C. Crummey 1962 — $12,000 1963 — $12,000
                 E. E. Crummey 1962 — $12,000 1963 — $12,000
                

The Commissioner of Internal Revenue determined that each of the petitioners was entitled to only one $3,000 exclusion for each year. This determination was based upon the Commissioner's belief that the portion of the gifts in trust for the children under the age of 21 were "future interests" which are disallowed under § 2503(b). The taxpayers contested the determination of a deficiency in the Tax Court. The Commissioner conceded by stipulation in that proceeding that each petitioner was entitled to an additional $3,000 exclusion for the year 1963 by reason of Janet Crummey having reached the age of 21.

The Tax Court followed the Commissioner's interpretation as to gifts in trust to David and Mark, but determined that the 1962 gift in trust to Janet qualified as a gift of a present interest because of certain additional rights accorded to persons 18 and over by California law. Thus, the Tax Court held that each petitioner was entitled to an additional $3,000 exclusion for the year 1962.

The key provision of the trust agreement is the "demand" provision which states:

"THREE. Additions. The Trustee may receive any other real or personal property from the Trustors (or either of them) or from any other person or persons, by lifetime gift, under a Will or Trust or from any other source. Such property will be held by the Trustee subject to the terms of this Agreement. A donor may designate or allocate all of his gift to one or more Trusts, or in stated amounts to different Trusts. If the donor does not specifically designate what amount of his gift is to augment each Trust, the Trustee shall divide such gift equally between the Trusts then existing, established by this Agreement. The Trustee agrees, if he accepts such additions, to hold and manage such additions in trust for the uses and in the manner set forth herein. With respect to such additions, each child of the Trustors may demand at any time (up to and including December 31 of the year in which a transfer to his or her Trust has been made) the sum of Four Thousand Dollars ($4,000.00) or the amount of the transfer from each donor, whichever is less, payable in cash immediately upon receipt by the Trustee of the demand in writing and in any event, not later than December 31 in the year in which such transfer was made. Such payment shall be made from the gift of that donor for that year. If a child is a minor at the time of such gift of that donor for that year, or fails in legal capacity for any reason, the child\'s guardian may make such demand on behalf of the child. The property received pursuant to the demand shall be held by the guardian for the benefit and use of the child." (emphasis supplied)

The whole question on this appeal is whether or not a present interest was given by the petitioners to their minor children so as to qualify as an exclusion

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under § 2503(b)¹ The petitioners on appeal contend that each minor beneficiary has the right under California law to demand partial distribution from the Trustee. In the alternative they urge that a parent as natural guardian of the person of his minor children could make such a demand. As a third alternative, they assert that under California law a minor over the age of 14 has the right to have a legal guardian appointed who can make the necessary demand. The Commissioner, as cross petitioner, alleges as error the Tax Court's ruling that the 1962 gifts in trust to Janet (then age 20) were present interests.

It was stipulated before the Tax Court in regard to the trust and the parties thereto that at all times relevant all the minor children lived with the petitioners and no legal guardian had been appointed for them. In addition, it was agreed that all the children were supported by petitioners and none of them had made a demand against the trust funds or received any distribution from them.

The tax regulations define a "future interest" for the purposes of § 2503(b) as follows:

"`Future interests\' is a legal term, and includes reversions, remainder, 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." Treasury Regulations of Gift Tax, § 25.2503-3.

This definition has been adopted by the Supreme Court. Fondren v. Commissioner of Internal Revenue, 324 U.S. 18, 65 S.Ct. 499, 89 L.Ed. 668 (1945); Commissioner of Internal Revenue v. Disston, 325 U.S. 442, 65 S.Ct. 1328, 89 L.Ed. 1720 (1945). In Fondren the court stated that the important question is when enjoyment begins. There the court held that gifts to an irrevocable trust for the grantor's minor grandchildren were "future interests" where income was to be accumulated and the corpus and the accumulations were not to be paid until designated times commencing with each grandchild's 25th birthday. The trustee was authorized to spend the income or invade the corpus during the minority of the beneficiaries only if need were shown. The facts demonstrated that need had not occurred and was not likely to occur.

Neither of the parties nor the Tax Court has any disagreement with the above summarization of the basic tests. The dispute comes in attempting to narrow the definition of a future interest down to a more specific and useful form.

The Commissioner and the Tax Court both placed primary reliance on the case of Stifel v. Commissioner of Internal Revenue, 197 F.2d 107 (2nd Cir. 1952). In that case an irrevocable trust was involved which provided that the beneficiary, a minor, could demand any part of the funds not expended by the Trustee and, subject to such demand, the Trustee was to accumulate. The trust also provided that it could be terminated by the beneficiary or by her guardian during minority. The court held that gifts to this trust were gifts of "future interests". They relied upon Fondren for the proposition that they could look at circumstances as well as the trust agreement and under such circumstances it was clear that the minor could not make the demand and that no guardian had ever been appointed who could make such a demand.

The leading case relied upon by the petitioners is Kieckhefer v. Commissioner of Internal Revenue, 189 F.2d 118 (7th Cir. 1951). In that case the donor

397 F.2d 85

set up a trust with his newly born grandson as the beneficiary. The trustee was to hold the funds unless the beneficiary or his legally appointed guardian demanded that the trust be terminated. The Commissioner urged that the grandson could not effectively make such a demand and that no...