Martinez v. Comm'r of Internal Revenue
| Decision Date | 19 October 1976 |
| Docket Number | Docket No. 7586—74. |
| Citation | 67 T.C. 60 |
| Parties | CHERLYN C. CALDWELL MARTINEZ, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioner established two identical irrevocable trusts, naming her mother as beneficiary of one and her father as beneficiary of the other. The terms of each trust require the trustee thereof to distribute at least annually all of the net income to the beneficiary for life. The trustee is prohibited from distributing any principal to the beneficiary. There is no power to accumulate income. Upon death of the beneficiary the trust terminates and the corpus reverts to petitioner, if living. The trustee was given the power, in his absolute discretion, to (1) make disbursements and charges from either income or principal and (2) determine whether a trust receipt constituted principal or income. Petitioner claimed two $3,000 exclusions on her gift tax return for gifts to the beneficiaries and excluded the value of her reversionary interests from the value of gifts subject to gift tax. Held: The trustor intended to give beneficiaries a viable income right which boilerplate administrative powers could not derogate under local law. Hence, the present interest and reversionary interests are capable of valuation and petitioner is entitled to $3,000-per-donee exclusion and to have value of reversionary interest excluded from taxable gifts. Charles A. Pinney, Jr., for the petitioner.
William K. Shipley and Allen R. Herson, for the respondent.
Respondent determined a deficiency in petitioner's gift tax for the calendar year 1969 in the amount of $15,609.67. The principal issue for our determination is whether, in two trusts established by petitioner, the administrative powers granted the trustee cause the interest retained by petitioner and the interest created in the beneficiary to be not susceptible of measurement on the basis of generally accepted valuation principles.
This case was submitted under Rule 122, hence all of the facts have been stipulated and are so found.
Petitioner Cherlyn C. Caldwell Martinez was a legal resident of Bonita, Calif., at the time her petition was filed. She filed her United States gift tax return for the calendar year 1969 with the Office of the Internal Revenue Service, International Operations Division, Washington, D.C.
On April 1, 1969, petitioner and Courtney Coleman Caldwell executed an irrevocable declaration of trust whereby cash in the amount of $80,000 was transferred from petitioner to Courtney Coleman Caldwell as trustee for the benefit of Eleanor J. Caldwell, mother of petitioner. Petitioner, on the same date, also executed an irrevocable declaration of trust, transferring $80,000 for the benefit of her father, Conrad C. Caldwell. Both trust instruments executed by petitioner contain identical terms and provisions except for the identity of the beneficiaries. Hereinafter, the singular shall be used to refer to both trusts.
Article I of the trust reads in pertinent part as follows:
1. The Trustee shall distribute to or apply for the benefit of the said beneficiary all of the net income annually, or in such convenient periodic installments during the year as the Trustee deems advisable, but in any event all of the income shall be distributed annually.
2. The Trustee shall pay such income to the said beneficiary, as set forth in (paragraph) 1 above, during the lifetime of the said beneficiary, and upon the death of the said beneficiary, this trust shall terminate and all of the trust estate and any undistributed net income thereon remaining shall revert to and be forthwith distributed to the Trustor. In the event the said Trustor shall predecease the said beneficiary, then the trust estate remaining upon the death of the said beneficiary shall be distributed to the issue of the Trustor by right of representation, and in the event the said Trustor leaves no issue then surviving, such property shall be distributed to the brothers of the said Trustor, to wit, CONRAD CHESTNUT CALDWELL, JR. and CLIFFORD CAMERON CALDWELL, or if they predecease the said beneficiary, then to their issue by right of representation.
3. The Trustee shall not distribute any principal of the trust estate to the beneficiary at any time.
The relevant administrative and management powers conferred upon the trustee are provided in Articles III and V of the trust agreement, as follows:
To carry out the purposes of this trust, and subject to any limitations stated elsewhere herein, the Trustee is vested with the following powers in addition to those now or hereafter conferred by law affecting the trust and the trust estate:
(1) To continue to hold any property, although not of a type or quality nor constituting a diversification considered proper for trust investments, including the Trustee's own stock, and to operate at the risk of the trust estate and not at the risk of the Trustee, any property or business received in this trust, as long as it may deem advisable, the profits and losses therefrom to inure or be chargeable to the trust estate as a whole and not to the Trustee.
(2) To invest and reinvest the principal and income if the Trustee is directed to accumulate it, and to purchase or acquire therewith every kind of property, real, personal or mixed, and every kind of investment, specifically including, but not by way of limitation, participation in any common trust fund, corporate obligations of every kind, and stocks, preferred or common, which men of prudence, discretion and intelligence acquire for their own account.
(3) To manage, control, sell, convey, exchange, partition, divide, subdivide, improve, repair; to grant options and to sell upon deferred payments; to lease for terms within or extending beyond the duration of this trust for any purpose; to create restrictions, easements and other servitudes.
(4) To advance funds to this trust for any trust purpose, such advances with interest at current rates to be a first lien on and to be repaid out of the principal or income; to reimburse himself from principal or income for any loss or expense incurred by reason of its ownership or holding of any property in this trust,
(6) To borrow money for any trust purpose upon such terms and conditions as the Trustee may deem proper; and to obligate the trust estate for repayment; to encumber the trust estate or any of its property by mortgage, deed of trust, pledge or otherwise, using such procedure to consummate the transaction as the Trustee may deem advisable.
(7) To make payments to any beneficiary under disability by making them to the guardian of the person of the beneficiary, if a minor, or may apply them for the beneficiary's benefit. Sums necessary for support and education may be paid directly to the minor beneficiary who, in the judgment of the Trustee, has attained sufficient age and discretion to render it probable that the moneys will be properly expended.
(11) To budget the estimated annual income and expenses of the trust in such manner as to equalize, as far as practicable, periodic income payments to the beneficiary.
(12) To determine what is principal, gross income or net distributable income and to charge the premium of any security purchased at a premium either against income or principal, or partly against income and partly against principal, as may be deemed best by the Trustee in its discretion.
Unless specifically limited, all discretions conferred upon the Trustee shall be absolute, and their exercise conclusive on all persons interested in this trust. The enumeration of certain powers of the Trustee shall not limit his general powers, the Trustee being vested with and having all the rights, powers and privileges which an absolute owner of the same property would have.
1. The Trustee shall pay out of principal or income as it may elect, or partly out of each in such shares as it may determine, property taxes, assessments, charges, attorney's fees, the Trustee's compensation, and other expenses incurred in the administration or protection of this trust. The discretion of the Trustee to pay these items from income or principal, or partly from each, may be exercised not only in the interest of the trust estate but for the benefit of any beneficiary. The income remaining after such expenditures as the Trustee shall elect to pay therefrom shall constitute net income.
The trust expressly provides that the laws of the State of California shall govern its validity, construction, and operation. Beneath the acceptance clause, executed and subscribed to by the trustee, petitioner certified and approved the terms and conditions of the trust.
I certify that I have read the foregoing Declaration of Trust and that it correctly states the terms and conditions under which the trust estate is to be held, managed and disposed of by the Trustee. I approve the Declaration of Trust in all particulars and request the Trustee to execute it.
Dated: April 1, 1969.
(S) Cherlyn Carol Caldwell
CHERLYN CAROL CALDWELL
Petitioner timely filed a United States gift tax return (Form 709) for the calendar year 1969, attaching a schedule thereto detailing calculation of the gift tax as follows:
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