Crummey v. CIR
| Citation | 397 F.2d 82 |
| Decision Date | 25 June 1968 |
| Docket Number | No. 21607,21607 |
| Parties | D. Clifford CRUMMEY et al., Petitioners, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | United States Courts of Appeals. United States Court of Appeals (9th Circuit) |
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.
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 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:
(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 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 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 guardian had been appointed. The court disregarded these factors and held that where any restrictions on use were caused by disabilities of a minor rather than by the terms of the trust, the gift was a "present interest". The court further stated that the important thing was the right to enjoy rather than the actual enjoyment of the property.
The Kieckhefer case has been followed in several decisions. In Gilmore v. Commissioner of Internal Revenue, 213 F.2d 520 (6th Cir. 1954) there was an irrevocable trust for minors. It provided that all principal and accumulated income would be paid on demand of the beneficiary. The trust was to terminate on the beneficiary's death. Anything remaining in the trust at the time of death would go to the beneficiary's estate.
The Tax Court stated that the demand provision would have made the advancements "present interests" but for spendthrift provisions and the authority of the Trustee to invest in non-income producing properties. The Circuit agreed that the demand provision made the advancements "present interests" and further held that the other provisions did not change that character. Reliance was placed on the "right to enjoy" language of Kieckhefer.
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