Forbes v. Commissioner of Internal Revenue
| Decision Date | 25 February 1936 |
| Docket Number | No. 3078.,3078. |
| Citation | 82 F.2d 204 |
| Parties | FORBES v. COMMISSIONER OF INTERNAL REVENUE. |
| Court | U.S. Court of Appeals — First Circuit |
W. Barton Leach, of Cambridge, Mass. (Frank A. Lynch, of Boston, Mass., on the brief), for petitioner for review.
Arnold Raum, Sp. Asst. to the Atty. Gen. (Frank J. Wideman, Asst. Atty. Gen., and J. Louis Monarch and Joseph M. Jones, Sp. Assts. to the Atty. Gen., on the brief), for the Commissioner of Internal Revenue.
Before BINGHAM, WILSON, and MORTON, Circuit Judges.
This is a petition for a review of a decision of the Board of Tax Appeals pursuant to sections 1001 and 1003 of chapter 27, 44 Stat. 9, 109, 110, Revenue Act of 1926, section 1101 of the Revenue Act of 1932, c. 209, 47 Stat. 169 (26 U.S.C.A. §§ 641, 642).
The sole issue raised in the briefs of the parties is whether the petitioner under a trust executed by her mother, Alice Bowditch Forbes, took a vested or contingent interest in one-third of the corpus of the trust. The statute involved is section 113 of the Revenue Act of 1928 (26 U.S.C.A. § 113 note).
On May 8, 1920, Alice Bowditch Forbes executed a deed of trust to continue for a term of ten years. The trust terminated on May 8, 1930, when there was distributed equally between her three children, including the petitioner, the corpus of the trust. Cases awaiting the determination of this case involve the taxes of the other two children.
The Commissioner determined that each of the children acquired a vested remainder in one-third of the corpus of the trust May 8, 1920, which the Board of Tax Appeals affirmed; while the petitioner contends that her interest in the corpus was contingent during the continuance of the trust, and in her return of income tax for 1930, in computing the gain or loss resulting from a sale of some of the securities received by the petitioner, used as a basis their market value on May 8, 1930.
The provisions of the trust upon which this issue depends are as follows:
The case was heard on the pleadings and a stipulation by the parties, which contained the following:
"It is further agreed that if the basis used by respondent is correct, as a mater of law, then the computation of the deficiencies is correct and agreed to by petitioners, but if the respondent has used the wrong basis, as a matter of law, then the parties agree that the returns as filed by petitioners are correct, and that there is no deficiency due from any of the petitioners."
In determining whether an estate is vested or contingent, the intent of the testator or settlor and the laws of the state in which the property is situated control. The determination of this issue, therefore, is governed by the laws of Massachusetts, in which state the trust was created and administered, and in which the property was located. De Vaughn v. Hutchinson, 165 U.S. 566, 570, 17 S.Ct. 461, 41 L.Ed. 827; Poe, Collector of Internal Revenue, v. Seaborn, 282 U.S. 101, 110, 51 S.Ct. 58, 75 L.Ed. 239.
Under the laws of Massachusetts we think the petitioner took only a contingent interest in the corpus of the trust until its termination on May 8, 1930.
There was no transfer in the instrument of trust of the corpus of the trust to any definite person during its continuance. Only the income of the trust was disposed of until the termination of the trust. The trust instrument provided that at its termination the corpus should be "distributed among such persons as then are entitled to the income, subject to the provisions hereinbelow stated as to the surviving husbands and wives of any of my children who may die before the termination of the trust." (Italics supplied.)
From paragraph numbered II of the instrument, it appears that during the life of the trust the income is to be paid to the three children of the grantor, but, if any of them died before the termination of the trust, leaving issue, the income of a deceased child shall thereafter during the continuance of the trust be divided among such issue. In case a child of the grantor dies leaving no issue, or if, leaving issue, such issue becomes extinct before the termination of the trust, the interest of such child or issue in the income or principal of the trust shall merge in and become a part of the trust for the benefit of the remaining beneficiaries.
Paragraph II further provided that, in case one of the three named children of the grantor died leaving a husband or wife, payment of one-half of the income of such child's share shall be made to the husband or wife, and the remainder to the surviving children or issue as above provided. It also provided for the contingency in case the husband or wife of a deceased child died before the termination of the trust.
This is not like the cases where the corpus of the trust is devised or conveyed to definite persons for life with remainder over to others; or where the income is given to a person for life or for a term of years and the corpus is disposed of at the termination of the trust to certain persons named. Here the income alone is given to the children during the continuance of the trust, or, in case of death, to the issue or to the husband or wife of a deceased child; and the corpus of the trust at its termination is given to such as are then entitled to the income — language commonly interpreted to create contingent remainders. Linscott v. Trowbridge et al., 224 Mass. 108, 111, 112 N.E. 956; Gardiner, Trustee, v. Everett, Ex'r et al., 240 Mass. 536, 539, 134 N.E. 372; New England Trust Co. v. Abbott, 205 Mass. 279, 281, 282, 91 N.E. 379, 137 Am.St.Rep. 437; Hale et al. v. Hobson et al., 167 Mass. 397, 399, 45 N.E. 913.
As there were no words of present gift of the corpus of the trust until its termination, the persons who would then take could not be determined until that time. That the children all lived and so took an equal share in the corpus when distributed in no way renders it certain that they would take at the termination...
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