French v. Commissioner of Internal Revenue

• Decision Date: 14 October 1943
• Docket Number: No. 12582.,12582.
• Citation: 138 F.2d 254
• Parties: FRENCH v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

138 F.2d 254 (1943)

FRENCH v. COMMISSIONER OF INTERNAL REVENUE.

No. 12582.

Circuit Court of Appeals, Eighth Circuit.

October 14, 1943.

Temple W. Seay, of Washington, D. C. (Phil D. Morelock, of Washington, D. C., on the brief), for petitioner.

F. E. Youngman, Sp. Asst. to Atty. Gen. (Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, A. F. Prescott, and S. Dee Hanson, Sp. Assts. to Atty. Gen., on the brief), for respondent.

Before SANBORN and RIDDICK, Circuit Judges, and LEMLEY, District Judge.

RIDDICK, Circuit Judge.

This petition to review a decision of the United States Board of Tax Appeals (now the Tax Court of the United States) presents the question whether certain transfers in trust were gifts of present interests in property for which in the computation of his gift tax the taxpayer was entitled to exclusions of $5,000 each, or were gifts of future interests for which no exclusions were allowable within the meaning of section 504(b) of the Revenue Act of 1932, 26 U.S.C.A. Int.Rev.Acts, page 585. The Board of Tax Appeals approved the determination of the Commissioner that each of the transfers was a gift of a future interest, and the exclusions claimed by the taxpayer were denied.

Five separate transfers of property were made by the taxpayer in the year 1938 to five trusts, known as Trusts N, O, P, Q, and J. Trusts N, O, P, and Q were created by the taxpayer in 1938, and the taxpayer concedes that the transfers of certain securities to these trusts were transfers of future interests in property, but he contends that the income from the trusts constituted gifts of present interests to the respective beneficiaries, and that, in respect to such income, he is entitled to the exclusions claimed. Trusts N and O were each created for "the benefit, support and education of" a named minor daughter, one of whom was seven, and the other, ten years of age at the time the trusts were created and the transfers made. Trust P was created for "the benefit and support" of taxpayer's wife. Trust Q was created for the benefit of the taxpayer's descendants per stirpes, the two minor daughters to take until such time as there might be in existence a child born after the date of the trust.

In each of the trusts N, O, P, and Q, the net income is to be computed as follows: "From the gross income derived from the trust, realized capital gains and taxes and other proper expenses incurred in executing, maintaining and preserving said trust, including a reasonable sum for the trustee's own compensation, shall be deducted; and the income remaining shall be known as the net income."

Distribution of net income in each of the trusts was provided for as follows:

"Trusts N and O.

"So long as a child of mine, who is under legal disability, is an income beneficiary hereunder, the trustee may in its discretion disburse or accumulate all or any part of the net income; but otherwise, and in any event after the disability shall have been removed the trustee shall in each accounting and distribution year distribute to the person or persons then beneficiary or beneficiaries as defined by Section III, until January 1, 1955, not less than one-fourth and not more than all of the net income and thereafter not less than one-half and not more than all of the net income, the amount so distributed being herein termed the distribution income; the amount of income withheld from distribution being herein termed the reserved income, which may be accumulated from year to year; * * * In the Trustee's discretion, the trustee may make distributions of income as and when received or at convenient intervals thereafter or may estimate the income to be available as distribution income during the current accounting and distribution year and make monthly or other periodic distributions, borrowing temporarily from the reserved income, if necessary, to make some of such payments.

"Trust P.

"* * * Until the first day of January, 1948 the trustee may in its discretion disburse or accumulate all or any part of the net income but thereafter the trustee shall in each accounting and distribution year distribute to the person or persons then beneficiary or beneficiaries as defined by Section III, not less than one-half and not more than all of the net income * * *. In the trustee's discretion, the trustee may make distributions of income as and when received or at convenient intervals thereafter or may estimate the income to be available as distribution income during the current accounting and distribution year and make monthly or other periodic distributions, borrowing temporarily from the reserved income, if necessary, to make some of such payments.

"Trust Q.

"The trustee may accumulate all or any part of the net income or may distribute all or any part of the currently accruing net income and accumulated net income for or to the beneficiaries (ascertained as herein provided) proportionately as they would take the principal if the trust were terminated at the moment of income distribution. Disbursements shall be to or for Class 1 beneficiaries the named minor daughters unless at any time a Class 2 beneficiary child of one of the daughters is, or Class 2 beneficiaries are, in being, in which event Class 1 beneficiaries shall be excluded from income benefits, and such disbursements shall be to or for such Class 2 beneficiary or beneficiaries."

Trust J was created by the taxpayer on June 6, 1932, one-half for the benefit of his wife or surviving widow, and one-half for the benefit of his descendants per capita. The trustee in Trust J was a sister of the taxpayer, and the corpus of the trust was taxpayer's promissory note payable on demand to the trustee or to her order in the sum of $100,000, with interest at the rate of five per cent per annum payable semiannually. On December 30, 1938, the taxpayer "transferred the sum of $5,000 to the trustee of Trust J." The net income of Trust J is defined and is to be distributed as follows: "From the gross income derived from the trust, realized capital gains and taxes and other proper expenses incurred in executing, maintaining and preserving said trust, including a reasonable sum for the trustee's own compensation, shall be deducted; and the income remaining shall be known as the net income. So long as a child of mine, who is under legal disability, is an income beneficiary hereunder, the trustee may in its discretion disburse or...