Gilmore v. Commissioner of Internal Revenue, 12037.

• Decision Date: 02 June 1954
• Docket Number: No. 12037.,12037.
• Citation: 213 F.2d 520
• Parties: GILMORE v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Sixth Circuit

213 F.2d 520 (1954)

GILMORE v. COMMISSIONER OF INTERNAL REVENUE.

No. 12037.

United States Court of Appeals, Sixth Circuit.

June 2, 1954.

William M. Emery, Chicago, Ill. (E. H. McDermott, John S. Pennell, Chicago, Ill., on the brief), for petitioner.

Walter Akerman, Jr., Washington, D. C. (H. Brian Holland, Ellis N. Slack, Lee A. Jackson, on the brief), for respondent.

Before ALLEN and McALLISTER, Circuit Judges, and GOURLEY, District Judge.

McALLISTER, Circuit Judge.

The issue in this case is whether a gift of property in trust for the benefit of minors, providing that the trustees pay the principal and income to the beneficiaries upon their demand, with a further provision permitting the trustees to invest the trust funds in income or non-income producing investments, is a gift of a present interest. If such gift is one of a present interest, it is not taxable to the donor under Title 26 U.S.C.A. § 1003 (b) (3). If the gift is one of a future interest, the donor, under the circumstances of this case, is taxable. The Commissioner held that the gifts were of future interests; and the Tax Court sustained such holding in its decision, from which review is sought in this court. We are of the opinion that the decision of the Tax Court was erroneous and should be reversed.

Petitioner made the gifts, of corporate stock, by the creation of trusts for her seven minor grandchildren. The trusts provided that the trustees "shall pay the principal and all income from the trust estate to (the named beneficiary) upon demand by the said (beneficiary), and in case of his death this trust will terminate and all of the remaining principal and accumulated income therefrom shall be be paid to the estate of the said (beneficiary)." (Emphasis supplied.)

The trust further provided that "All payments of income or distribution of principal to the beneficiary . . . shall be made to such beneficiary in person or upon his personal receipts;" that they should not be grantable, transferable, or otherwise assignable in anticipation of payment thereof, in whole or in part, by the voluntary or involuntary acts of any such beneficiary, or by operation of law, and should not be liable or taken for any obligation of such beneficiary. It was further provided that payments or distributions to an incompetent beneficiary might be made by the trustees for the benefit of such beneficiary in certain designated ways as in the opinion of the trustees would be most desirable, as noted in the margin.¹

The Commissioner, in his determination of deficiency, denied the claimed exclusion and determined that the gifts were of future interests on the ground that "Since the beneficiaries at the time of the transfers ranged in ages from one to seven years it is considered that each of the transfers of the trust income and corpus were `future interests' as defined by the Commissioner." The Tax Court's decision was, however, not based on the minority of the beneficiaries but upon the terms of the trust which the court construed so to limit the beneficiaries' rights, as to compel the conclusion that the gifts involved were of future interests, whether or not the beneficiaries were minors.

While the statute allows an exclusion for gifts of property other than gifts of future interests, it does not define "future interests;" but the term has the accepted meaning of an interest limited to commence in use, possession, or enjoyment, at some future date. United States v. Pelzer, 312 U.S. 399, 61 S.Ct. 659, 85 L.Ed. 913. An interest in property is a present interest if the donee has the right presently to use, possess, or enjoy it. Fondren v. Commissioner, 324 U.S. 18, 65 S.Ct. 499, 89 L.Ed. 668. The Tax Court, in the instant case, held that the provision in the trusts, that the trustees shall pay the principal and all income upon demand to the beneficiary, gave the beneficiary the right to presently use, possess, or enjoy the property, and that this provision, alone, rendered all the gifts of present interest. But the court went on to say, and to hold, that the provision giving the trustees the authority to invest the trust corpus in non-income producing property, as well as the spendthrift clause, eliminated the right of the beneficiaries to demand payment of principal and income given them in the prior provision of the trust instrument. This seems to us a non-sequitur, which controlled and vitiated the decision below.

The Tax Court considered that the provision granting to the trustees general investment powers, including the power to invest in such investments, whether producing income or not, as the trustees in their discretion should deem proper and for the best interests of the donee, resulted in making the donee's right to income contingent on the trustees' willingness to invest the corpus in such manner that income would be derived therefrom, and that such a contingent right was not a right presently to use, possess, or enjoy the property. But the trust gives the donee the absolute right to all income. The fact that there may not be income during a year is not a contingency imposed by the donor. It is the right of a donee to the income, rather than the accident of whether there is income at any given time, that is the criterion of present interest. That the corpus of a trust may consist of...