Davidson v. Welch, 6995.

• Decision Date: 04 March 1938
• Docket Number: No. 6995.,6995.
• Citation: 22 F. Supp. 726
• Parties: DAVIDSON v. WELCH, Collector of Internal Revenue.
• Court: U.S. District Court — District of Massachusetts

22 F. Supp. 726

DAVIDSON v. WELCH, Collector of Internal Revenue.

No. 6995.

District Court, D. Massachusetts.

March 4, 1938.

J. Alec Lane and Earle W. Carr (of Gaston, Snow, Saltonstall, Hunt & Rice), both of Boston, Mass., for plaintiff.

Jerome P. Carr, Sp. Asst. to Atty. Gen. (Francis J. W. Ford, U. S. Atty., and Arthur L. Murray, Sp. Asst. to U. S. Atty., both of Boston, Mass., James W. Morris, Asst. Atty. Gen., and Andrew D. Sharpe and Arthur L. Jacobs, Sp. Assts. to Atty. Gen., on the brief), for defendant.

SWEENEY, District Judge.

In this suit the plaintiff seeks to recover an alleged overpayment of gift tax for the year 1934. The defendant has demurred to the action, assigning as a reason therefor that the matter contained in the declaration is not sufficient to constitute a cause of action, and, secondly, that it does not appear that the taxes which the plaintiff seeks to recover were improperly or illegally collected under the provisions of the Revenue Act of Congress of June 6, 1932, 47 Stat. 169.

Findings of Fact

On January 18, 1934, the plaintiff and his wife created an irrevocable trust, naming the Old Colony Trust Company as trustee. The property transferred consisted of three life insurance policies which had a then present surrender value of of $37,740.05. The instrument provides that upon the plaintiff's death the proceeds are to be divided into equal shares, one for each of the seven children of the plaintiff then surviving, and one share for the issue of any child who has died, leaving issue. The trustee is to pay the income of each share to the child for whom it is held for life, paying one-half of the principal when said child reaches the age of 45, provided that at least 10 years have elapsed after the plaintiff's death. The final date of distribution is set at 21 years after the death of the survivor of the plaintiff's children and grandchildren living at the time of establishment of the trust. The instrument contains a "spendthrift trust" drawn in conformity with the laws of Massachusetts.

Following the establishment of the trust, and during the year 1934, the plaintiff paid premiums on the policies held by the trustee in the amount of $20,971.25. In the same year, the plaintiff also made an outright gift to his daughter. Elizabeth of a home worth $20,000. In filing his 1934 gift tax return, the plaintiff claimed a total exclusion of $35,000, based on the above gifts. $5,000 of this amount represented the first $5,000 of the value of the home given to his daughter Elizabeth, which it is conceded he was entitled to as an exclusion, and the remaining $30,000 represented an exclusion of $5,000 for each of the gifts made to his other six children.

A deficiency of $1,213.99 was determined by the Commissioner on the ground that the interests conveyed were future interests, and hence not subject to exclusion under section 504(b) of the Revenue Act of 1932, 26 U.S.C.A. § 553(b). The plaintiff paid this deficiency, with interest, duly protesting the assessment of the deficiency. His total payment, including interest, was in the sum of $1,272.26. A claim for refund of this amount was made, and on April 3, 1936, was rejected. This suit was brought for the recovery of that amount and interest.

It is to be noted at the outset that the Commissioner's denial of the claim for refund was based upon a ruling that the gifts set up in the trust indenture were gifts of future interests, and therefore not entitled to exclusion from the gift tax return. The real ground upon which this case now must turn is not the question of whether the interests were future or present, for, in the light of Commissioner v. Wells, 7 Cir., 88 F.2d 339, Commissioner v. Krebs, 3 Cir., 90 F.2d 880, and Noyes v. Hassett, D.C., 20 F.Supp. 31, I am of the opinion that the interests transferred from the donor were present interests. A ruling to this effect will appear later in this opinion. The real question concerns the identity of the donee of the gifts. The respondent urges that the decision in the case of Commissioner v. Wells, supra, to the effect that the gift was of a present interest, is erroneous, because it is predicated upon the theory that the real donee was the trust. The decision in that case may have been made on some such basis, but in the cases of Commissioner v. Krebs and Noyes v. Hassett the courts decided that similar gifts were of present interest, rather than future, without regard to the identity of the donee. I choose to follow all of these cases in reaching my decision that the gifts in the instant case are gifts of present interests, but I will depart from the Wells Case on the question of the identity of the donee.

In Commissioner v. Wells, supra, it was held that, where a donor, by three separate trust instruments, made gifts of corporate stock with direction to the trustee to collect the income from the trust corpus, and, after paying expenses, taxes, and the...