Jolley v. United States
| Decision Date | 29 September 1966 |
| Docket Number | Civ. A. No. 5016. |
| Citation | 259 F. Supp. 315 |
| Court | U.S. District Court — District of South Carolina |
| Parties | Robert A. JOLLEY, Sr., Plaintiff, v. UNITED STATES of America, Defendant. |
Robert A. Dobson, Jr., and Robert A. Dobson, III, Greenville, S. C., for plaintiff.
John C. Williams, U. S. Atty., Greenville, S. C., and James D. McCoy, III, Asst. U. S. Atty., Greenville, S. C., for defendant.
Plaintiff was assessed a tax deficiency on a gift tax return for 1960. The deficiency was paid; claim for refund was filed; and suit for refund was instituted.
On June 10, 1960, the taxpayer transferred certain stocks and bonds in trust in favor of his three adult children: Robert A. Jolley, Jr., age 39; James E. Jolley, age 33; Mamie Jolley Bruce, the mother of two minor children and the only parent among the beneficiaries. They were named trustees as well as the prime beneficiaries.
The trust broadly provides, with certain qualifications, that the corpus of the trust is to be held for a period of ten years to be distributed at the expiration of the period to the three adult children beneficiaries. The income of the trust is to be distributed monthly or quarterly throughout the existence of the trust to the three beneficiaries. This dispute arises over the question whether the gifts of the income interest in the trust qualified for the annual gift tax exclusion as provided in Section 2503(b).1 The dispute will be resolved by interpretation of the terms of the trust instrument. If the gifts qualify for the exclusion the taxpayer is entitled to a refund of the assessment.2 The defendant contends that the gifts fail to qualify because (1) the gifts are limited to commence in use, possession or enjoyment at some future date or time because either (a) the corpus may be distributed to other than the income beneficiaries or (b) the trustees have the discretionary power to withhold income, or both; and that (2) the language of the instrument renders the gift of income interest incapable of evaluation. The plaintiff contends that the defendants interpretations are erroneous; and that even if true the prospect of exercising the powers are so remote as to make them negligible; and that, since all trustees are beneficiaries and all must concur in any action, the veto power of one trustee to protect the present enjoyment of income effectively converts the powers to merely matters of form and of no substance.
The disputed portions of the trust instrument are as follows:
By consent of parties and with the approval of the court the case was submitted for decision upon briefs and depositions. The defendant has before the court a motion to exclude certain testimony contained in the various depositions.
For some years prior to the creation of the trust the taxpayer made annual gifts to his children valued at approximately $6000 per year. Substantial gifts had also been made to the grandchildren of the taxpayer, the children of Mamie Jolley Bruce. For several years the taxpayer had contemplated creating such a trust, and when a trip abroad became imminent he had his attorneys, who were knowledgeable in tax matters, create the trust. The transfer in trust was the form chosen in order to prevent an unequal distribution among the children which may have resulted from a division of the stocks and bonds which constituted the gifts.
Section 2503(b)3 expressly limits the annual exclusion of the first three thousand dollars of gifts made during the taxable year to gifts "other than gifts of future interests in property" — or — a "present interest in property." The distinction between the present interests in property and the future interests in property which the statute contemplates has been set forth many times and was stated in Fondren v. Commissioner of Internal Revenue, 324 U.S. 18, 65 S.Ct. 499, 89 L.Ed. 668 (1945), as follows:
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, * * * 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.
The same idea is expressed in the Treasury Regulations on Gift Tax (1954 Code) Section 25.2503(a) which provides in part that:
"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.
The present interests the taxpayer asserts is the income interest on the trust which is to be distributed in either monthly or quarterly installments according to Item III(1) of the trust.4
The income of a trust which is required to be distributed periodically is a gift of present interest, Fondren v. Commissioner of Internal Revenue, 324 U.S. 18, 65 S.Ct. 499, 89 L.Ed. 668 (1945), however, the gift interest must not only be "present" but one capable of evaluation. See Herrman's Estate v. Commissioner of Internal Revenue, 235 F.2d 440 (5th Cir. 1956). The income interest of a trust is capable of being evaluated in accord with the provisions of Treasury Regulation Section 25.2512-5; and the computations have been made in this instance, showing the income interest to be over three times the amount of the annual exclusion. This computation has been stipulated by the parties subject, however, to the defendant's contention that other provisions in the trust agreement render the gifts so uncertain that they cannot be evaluated actuarially or by any other method. The objections that the defendant has raised, as has been mentioned, are that (1) the trustees have a discretionary power to invade corpus leaving any income interest uncertain, and (2) that the trustees have the power to withhold income.
In Herrman's Estate5 the court, in denying an exclusion because of the taxpayer's failure to establish the allocable value of the admittedly present gift of income, stated:
Where, as here, the trustee is authorized to distribute all or any part of the principal, the distribution, be it little or much, would result in a ratable reduction in the trust income and a proportional reduction in the income producing...
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Van Den Wymelenberg v. United States
...the income of this trust was a gift of a present interest. Albright v. United States, 308 F.2d 739 (5th Cir. 1962); Jolley v. United States, 259 F.Supp. 315 (D.S.Car.1966). However, in order to qualify for the annual exclusion, the value of the present interest must be determinable as of th......