Jones v. Comm'r of Internal Revenue

• Decision Date: 13 November 1957
• Docket Number: Docket No. 57509.
• Citation: 29 T.C. 200
• Parties: HUGH MCK. JONES, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

29 T.C. 200

HUGH MCK. JONES, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 57509.

Tax Court of the United States.

Filed November 13, 1957.

Thomas S. McPheeters, Jr., Esq., and William H. Charles, Esq., for the petitioner

William H. Welch, Esq., for the respondent.

Petitioner created five trusts in the year 1951, and transferred to the trustees of each, without consideration, securities valued at $21,645. Four of these trusts were for the respective primary benefits of his four children, and the other was for the joint primary benefit of four grandchildren who were minors. Each of the four children's trusts gave the entire trust income to the primary beneficiary for life, and the remainder to others; and each also granted a power to the corporate trustee to encroach upon the principal of the trust, from time to time when it believed it proper to do so, in order to make advancements for the benefit of any beneficiary of such sums as the trustee might consider reasonable and proper in the circumstances, to provide for the beneficiary's proper maintenance, education, and support in accordance with the standard of living to which he was accustomed, or to provide for any emergency which might arise affecting him, occasioned by sickness or casualty. The fifth trust for the grandchildren provided, in substance, that the trustees should divide the trust estate into four equal shares; apply for the benefit of each grandchild until he attained the age of 21 years, so much of the income and principal of his shares as the trustees might deem necessary for his education, maintenance, and support; and, after the grandchild reached the age of 21 years, dispose of the remaining income and principal in the manner specified.

Held:

1. In the case of the four trusts for petitioner's children, the rights of the primary beneficiaries to receive income, but not their rights to receive possible advancements from principal, were present interests within the meaning of section 1003(b), I.R.C. 1939; and that the values of such present interests were determinable because: The corporate trustee's power to encroach upon principal was limited by an ascertainable standard; the grantor's intention was that the corporate trustee, in determining the need for any encroachment, should consider the beneficiary's other available resources; and that, in view of the financial circumstances of the several beneficiaries when the trusts were created, the possibility of encroachments occurring to defeat the flow of trust income, was so remote as to be negligible. Values of the present interests of the beneficiaries determined to be more than $3,000 each; and four exclusions from gifts, of $3,000 each, allowed pursuant to said section 1003(b).

2. In the case of the trust for the grandchildren, the rights of such grandchildren to receive such unascertained amounts of trust income and principal as the trustees might deem necessary for specified purposes, were future interests within the meaning of said section 1003(b); and, accordingly, that no exclusion from gifts, in respect thereof, is allowable.

PIERCE, Judge:

Respondent determined deficiencies in gift tax in respect of the petitioner, for the years 1951 and 1952 in the amounts of $4,331.79 and $27.93, respectively.

The issues for decision are:

(1) Whether, in determining the amount of petitioner's gifts for the year 1951, there should be allowed pursuant to section 1003(b) of the 1939 Code, ¹ four exclusions of not to exceed $3,000 each, in respect of the interests of his four living adult children in four separate irrevocable trusts which he created in said year. The answer depends on whether the values of the present interest (as distinguished from future interests) of said beneficiaries in the trusts are susceptible of determination.

(2) Whether, in determining the amount of petitioner's gifts for 1951, there also should be allowed pursuant to said section of the Code, four other exclusions, in respect of the interests of four minor grandchildren of the petitioner in a fifth irrevocable trust which he created in said year. The answer to this depends on whether the interests of said beneficiaries in the trust were future interests, within the meaning of said section.

No question need be decided with respect to the year 1952. The deficiency for said year resulted solely from the increased rate of tax which became applicable for said year, by reason of the additional amount of gifts determining for the preceding year 1951.

FINDINGS OF FACT.

Several of the facts have been stipulated. The stipulation, together with the exhibits thereto attached, is incorporated herein by reference.

The petitioner, Hugh McK. Jones, is a resident of St. Louis County, Missouri. His gift tax return for the year 1951 was filed with the then collector of internal revenue for the first district of Missouri; and his gift tax return for 1952 was filed with the district director of internal revenue for the St. Louis, Missouri, district.

On September 21, 1951, the petitioner, who was then 70 years of age, created five separate irrevocable trusts, by entering into five separate indentures of trust which were executed under date of September 20, 1951, by him as the grantor, and by himself and the St. Louis Union Trust Company, a corporation of the city of St. Louis, Missouri, as cotrustees. Four of these trusts were created for the respective primary benefits of his four living adult children; and the fifth trust was created for the joint primary benefit of four minor children of a deceased son. At the time of the creation of said trusts, petitioner transferred to the trustees of each, without actual consideration, marketable securities of the then fair market value of $21,645, as the initial trust estate.

More specific facts respecting said trusts and the beneficiaries thereof are as follows:

Facts re Trusts for Children.

The primary beneficiaries of the four trusts for the benefit of petitioner's children were, respectively: His son, Hugh McK. Jones, Jr.; his daughter Florence T. Jones (whose present name is Florence Jones Terry); his daughter Grace J. Borg (whose present names is Grace Borg Tupper); and his daughter Carroll Jones McPheeters. All of these children were adults at the time of the creation of the trusts.

The four indentures for said trusts were essentially the same for present purposes. The indenture of the trust for the son, Hugh McK. Jones, Jr., which is typical, provided in substance and so far as here material, as follows:

Section Two provided, in substance, that the entire net income of the trust estate should be paid to Hugh McK. Jones, Jr., son of the grantor, for and during his natural life; and that upon the death of said son, the trustees should continue to hold the trust estate, in further trust, for the benefit of the then living descendants of said son, per stirpes, or in the absence of such descendants for the benefit of certain other described persons exclusive of the grantor, for such periods and in accordance with such terms and conditions as were mentioned in the indenture.

Section Four provided:

SECTION FOUR: The Grantor hereby authorizes the St. Louis Union Trust Company, Trustee, to encroach upon the principal of the trust estate for the use and benefit of any of the beneficiaries of the trust created hereby to provide for their proper maintenance, education and support, in accordance with the standard of living to which they have been accustomed, or to provide against any emergency which may arise affecting them occasioned by sickness, accident, ill health, misfortune or otherwise, and the said Trustee may advance such sum or sums out of the principal of the trust estate for the use and benefit of said beneficiaries as it shall consider reasonable and proper under the circumstances and may make such advancements from time to time when it believes it proper to do so and for the best interests of said beneficiaries.

The financial circumstances of each said child of the petitioner, on the date of said gifts in trust, were as follows:

(a) Hugh McK. Jones, Jr., was 31 years of age, married, and the father of three children. He was an architect engaged in his profession in Guilford, Connecticut. He lived with his family in Guilford, in a house which he and his wife owned jointly, which cost approximately $47,000 and was subject to a mortgage of about $15,000. In addition, he owned unimproved real estate near Guilford, which was acquired and held for development and subdivision purposes, and which had a cost of $14,500 and was unencumbered. Also, he was the beneficiary of the following trusts:

(1) Trust under conveyance of Hugh McK. Jones, Jr. (himself), dated January 7, 1949, with St. Louis Union Trust Company, trustee, T.C. 16,083. The assets of this trust consisted of securities having a market value in September 1951 of approximately $100,000, and the net income from said trust during the year 1951 was approximately $5,700. Said Hugh McK. Jones, Jr., was entitled to all the income from said trust and had the right to revoke the same, in whole or in part, at any time.

(2) Trust under conveyance of Carroll West Jones (his mother) dated September 21, 1951, St. Louis Union Trust/ Company and Hugh McK. Jones, trustees, T.C. 17,124. The assets of this trust consisted of marketable securities worth on September 21, 1951, $21,500. Said Hugh McK. Jones, Jr., was entitled to all of the net income of said trust during his lifetime. The income from this trust paid or payable to Hugh McK. Jones, Jr., for his taxable year ended December 31, 1952, was $974.54.

(3) Trust under conveyance of Carroll West Jones dated December 31, 1941, St. Louis Union Trust Company and Hugh McK. Jones, trustees, T.D. 13,218. The assets of this trust consisted of marketable securities having a value on September 21, 1951, of approximately $16,000. Under the terms of this trust said Hugh...