Fondren v. Commissioner of Internal Revenue

Decision Date29 January 1945
Docket NumberNo. 88,88
Citation89 L.Ed. 668,65 S.Ct. 499,324 U.S. 18
PartiesFONDREN et al. v. COMMISSIONER OF INTERNAL REVENUE. *
CourtU.S. Supreme Court

Mr. W. M. Cleaves, of Houston, Tex., for petitioners.

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

Mr. Justice RUTLEDGE delivered the opinion of the Court.

In 1935, 1936 and 1937 petitioner, Ella F. Fondren, and her husband, since deceased, created seven separate irrevocable trusts, each in favor of a grandchild of tender years; and each of them made gifts to each trust of corporate stock having the fair market value of $5,975. The donors made gift tax returns for 1937, claiming the statutory exclusion of $5,000 for each gift, and accordingly reported taxable gifts for each trust of $975. Gift taxes were paid on this basis.

The Commissioner made deficiency assessments, disallowing the exclusions on the ground that the gifts were of 'future interests in property' within the meaning of the Revenue Act of 1932, c. 209, 47 Stat. 169, and Treasury Regulations 79 (1936 ed.)1 The Tax Court upheld the Commissioner, the cases being consolidated for hearing and decision. 1 T.C. 1036. The Circuit Court of Appeals affirmed the Tax Court's decision, one judge dissenting. 5 Cir., 141 F.2d 419. Certiorari was granted, 323 U.S. 685, 65 S.Ct. 35, because of the importance of the question as af- fecting the taxability of gifts made for the benefit of minor children and because of alleged or apparent conflict with decisions of other courts.2

The sole issue is whether the gifts were of 'future interests' within the meaning of the statute and the regulation. The latter provides:

Art. 11. '* * * 'Future interests' is a legal term, and includes reversions, remainders, 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. * * *' (Emphasis added)

Upon the facts the issue turns on whether the interests acquired by the minor beneficiaries were 'limited to commence in use, possession, or enjoyment at some future date or time.' Ryerson v. United States, 312 U.S. 405, 61 S.Ct. 656, 85 L.Ed. 917; United States v. Pelzer, 312 U.S. 399, 61 S.Ct. 659, 85 L.Ed. 913.

Under these decisions it is not enough to bring the exclusion into force that the donee has vested rights. In addition he must have the right presently to use, possess or enjoy the property. These terms are not words of art, like 'fee' in the law of seizin, United States v. Pelzer, supra, 312 U.S. at page 403, 61 S.Ct. at page 661, 85 L.Ed. 913, but connote the right to substantial present economic benefit. The question is of time, not when title vests, but when enjoyment begins. Whatever puts the barrier of a substantial period between the will of the beneficiary or donee now to enjoy what has been given him and that enjoyment makes the gift one of a future interest within the meaning of the regulation.

Accordingly, it has been held that if the income of a trust is required to be distributed periodically, as annually, but distribution of the corpus is deferred, the gift of the income is one of a present interest, that of the corpus one in futuro. Fisher v. Commissioner, 9 Cir., 132 F.2d 383; Sensenbrenner v. Commissioner, 7 Cir., 134 F.2d 883. A fortiori, if income is to be accumulated and paid over with the corpus at a later time, the entire gift is of a future interest,3 although upon specified contingency some portion or all of the fund may be paid over earlier.4 The contingency may be the exercise of the trustee's discretion, either absolute or contingent. 5 It may also be the need of the beneficiary, not existing when the trust or gift takes effect legally, but arising later upon anticipated though unexpected conditions, either to create a duty in the trustee to pay over or to permit him to do so in his discretion.6

In the light of these principles and decisions, it is necessary to consider the terms of the trusts and the circum- stances in which the gifts were made. The trust instruments were substantially uniform except for variations in the names of the beneficiaries and, in case of death, their successors in interest. The trusts were irrevocable, the donors retaining no beneficial interest in the estates. Each instrument named the donor, W. W. Fondren, as trustee, and Ella F. Fondren, the other donor, as successor trustee. They reserved the rights as donors to remove any trustee, except Mr. Fondren, and to name successor trustees. Subject to these reservations and the directions set forth below, the trustee was given substantially complete control.

The trusts' stated purpose was 'to provide for the personal comfort, support, maintenance, and welfare' of the grandchildren. But from the explicit recitals of the instruments,7 as well as the evidence, including a stipulation, it is clear that the parents of each child were so situated that, when the gifts were made, they were fully able to provide for and educate him. And, from the same recitals, it is clear there was little reason to believe that any parent would not continue so until the child's majority. Accordingly, in each instance, the trust was to continue until the child should attain the age of thirty-five. Hence also the income was to be accumulated, except upon the contingencies specified below, and each beneficiary was to receive 25 per cent of the corpus and accumulations at age twenty-five, 33 1/3 per cent at age thirty, and the remainder at age thirty-five.

Aware of the uncertainties of our world, however, the donors directed in Article 3:

'* * * (T)he Trustee shall provide for the support, maintenance and education of our said Grandson, using only the income of said estate for the purpose if it be sufficient. If it be necessary to use any of the corpus of the estate for that purpose and in the judgment of the Trustee it is best to do so, said Trustee may make advancements out of the corpus of said trust estate for such purpose for the benefit of our said Grandson.

'It is contemplated, however, that our said Grandson will have other adequate and sufficient means of support, and that it will not be necessary to use either the income or the corpus of the trust estate hereby created to properly provide for his education, maintenance and support; and, if the income from the trust estate be not needed for these purposes, then all of the income from said trust estate not so needed shall be by the Trustee passed to capital account of said trust estate, and shall be and become a part of said trust estate, it being our hope that all of the earnings and income of said trust estate during the period of this trust may be used to augment the trust estate and be delivered to our said Grandson at the periods herein provided for. It is expressly provided, however, that our said Grandson shall be properly maintained, educated and supported, and if it be necessary to use all of the income and even all of the corpus of the trust estate hereby created and all augmentations thereof, it shall be the duty of the Trustee to see that this obligation shall be properly and reasonably discharged. * * *' (Emphasis added)

In view of the apparently conflicting terms of this article for use of the corpus, the exact scope of the trustee's discretion is by no means clear. But this need not be determined. Whether the disposition is in his judgment entirely, as the first clause indicates, or under the second is so only with reference to how much of the fund may be needed,8 the trustee cannot act in any case to apply corpus or income for the support, maintenance and education of the beneficiary until necessity arises.

Under the particular facts, this requirement is important in two respects. It is, as petitioners urge, a limitation upon the trustee's discretion. His power is not unconfined. Even though the existence and amount of need may be in the first instance for his determination, it does not follow that, need existing, the trustee arbitrarily could refuse to make the application. The case therefore is not one in which present enjoyment is dependent upon an exercise of the trustee's absolute discretion.

But this does not show, as petitioners seem to think, that the minor beneficiaries had, at the moment of the gift, a present right of enjoyment. It rather shows the contrary—that their right was not absolute and immediate, but was conditioned, during minority and afterward until the times specified for distribution, upon a contingency which might never arise. That contingency by the explicit terms of the trust, was the existence of need which was then nonexistent and, in the stated contemplation of the donors, was not likely to occur in the future, at any rate during the child's minority. The circumstances surrounding the donors and the donees confirm these recitals. The case is one therefore in which the gift, if presently vested, made enjoyment contingent upon the occurrence of future events, not only uncertain, but by the recitals of the instrument itself improbable of occurrence. The gifts con- sequently were of 'future interests in property' within the meaning of Section 504(b).

Petitioners' contrary argument, apart from the misconception that legal vesting of the interest without more satisfies the statute,9 rests chiefly upon considerations arising from the legislative history and from the fact that gifts for the benefit of children under legal disability to manage their own property must make provision for its control by trustees or otherwise.

Special stress is placed on the fact that each gift was made to or for the benefit of a specifically named beneficiary then in esse and for a definite amount. As the Pelzer opinion noted, 312 U.S. at page 403, 61 S.Ct. at page 661, 85 L.Ed. 913, the committee reports recommending the legislation stated: 'The exemption being available only in so far...

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