Pelzer v. United States, 43923.

• Decision Date: 04 March 1940
• Docket Number: No. 43923.,43923.
• Citation: 31 F. Supp. 770
• Parties: PELZER v. UNITED STATES.
• Court: U.S. Claims Court

31 F. Supp. 770

PELZER v. UNITED STATES.

No. 43923.

Court of Claims.

March 4, 1940.

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Robert A. Littleton, of Washington, D. C., for plaintiff.

Elizabeth B. Davis, of Washington, D. C., and Samuel O. Chark, Jr., Asst. Atty. Gen. (Robert N. Anderson, Sp. Asst. to Atty. Gen., on the brief), for defendant.

Before WHALEY, Chief Justice, and GREEN, WILLIAMS, and WHITAKER, Judges.

WILLIAMS, Judge.

Plaintiff seeks to recover gift taxes alleged to have been overpaid for the years 1932, 1933, 1934, and 1935. The facts have been stipulated by the parties and are not in controversy.

The plaintiff executed a trust instrument on July 14, 1932, which is herein referred to as the "children's trust." The instrument recited that it was created for the benefit of the trustor's living grandchildren (eight in number, being specifically named) and other grandchildren that might thereafter be born during the life of the trust. The instrument further provided that for a period of 10 years from the date of its execution the income from the trust fund should be accumulated and invested, that at the expiration of such ten-year period the trustee should pay an equal grandchild's distributive share of the income to each of the grandchildren who were then living and twenty-one years of age or over, and that as each grandchild reached twenty-one years of age the trustees should pay the share of the income to him. If other grandchildren were born during the life of the trust, they were entitled to participate therein on the same basis as the living grandchildren. If any of the grandchildren died leaving issue, his share should belong to his issue, but if he should die without issue his share should go to his surviving brother and/or sister, if any, and if none, then to the other grandchildren. At the termination of the trust the corpus was to be divided between the grandchildren or their survivors.

On December 28, 1934, plaintiff executed a trust instrument, herein referred to as the "adult trust." The income of this trust was to be paid to the trustor's wife and three daughters in equal proportions. Upon the death of the wife, her share of the income was to be divided equally among the trustor's grandchildren, and upon the death of either of the daughters her share was to go to her children in equal shares. At the termination of the trust the corpus was to go to the grandchildren of the trustor as each of them reached the age of twenty-one years.

In each of these trusts the plaintiff retained no economic interest or legal control over the property transferred, and the trustee acquired no economic interest in the property so transferred, but is charged only with the safekeeping and management of the property transferred for the benefit of the persons named. The plaintiff was powerless to change the terms of the said instruments, regain control of the property transferred, or change the interest of the beneficiaries therein. Also, the trustee is likewise powerless, and the trust instruments are self executing.

During the years 1932, 1933, 1934, and 1935, plaintiff made gifts to the children's trust, and during the year 1934 he made a gift to the trustee of the adult trust.

Plaintiff filed gift-tax returns for the years 1932, 1933, 1934, and 1935. Claims for refund for each of the years involved were duly filed and allowed in part and disallowed in part by the Commissioner of Internal Revenue. In passing on these claims the Commissioner allowed the plaintiff one $5,000 exclusion for each of the gifts to the children's trust and one $5,000 exclusion for the gift to the trustee for the adult trust. The basis of plaintiff's claim for refund and of this suit is that the plaintiff was entitled to eight $5,000 exclusions for each of the gifts for the children's trust and to four $5,000 exclusions for the gifts to the adult trust.

The question for decision is whether the taxpayer is entitled to a $5,000 exclusion in each of the years 1932, 1933, 1934, and 1935, for each of the gifts made in trust for the benefit of eight named and living grandchildren; and for the year 1934 for each of the gifts made in trust for the benefit of the taxpayer's wife and three daughters.

The Commissioner of Internal Revenue holds that in the case of the annual gifts made in trust for each of the named living grandchildren of the taxpayer only one $5,000 exclusion is allowable for each year, and that in the case of the gifts made in 1934 in trust for the taxpayer's wife and three daughters only one $5,000 exclusion is allowable.

Section 501 of the Revenue Act of 1932, 47 Stat. 245, 26 U.S.C.A. § 550, provides as follows:

"(a) For the calender year 1932 and each calendar year thereafter a tax computed as provided in section 502 551, shall be imposed upon the transfer during such calendar year by any individual, resident, or nonresident, of property by gift.

"(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a non-resident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States. The tax shall not apply to a transfer made on or before the date of the enactment of this Act June 6, 1932.

"(c) The tax shall not apply to a transfer of property in trust where the power to revest in the donor title to such property is vested in the donor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such property or the income therefrom, but the relinquishment or termination of such power (other than by the donor's death) shall be considered to be a transfer by the donor by gift of the property subject to such power, and any payment of the income therefrom to a beneficiary other than the donor shall be considered to be a transfer by the donor of such income by gift."

Section 504 of the Revenue Act of 1932, 47 Stat. 247, 26 U.S.C.A. § 553, provides as follows:

"(a) General Definition. The term `net gifts' means the total amount of gifts made during the calender year, less the deductions provided in section 505 554.

"(b) Gifts Less Than $5,000. In the case of gifts (other than of future interests in property) made to any person by the donor during the calendar year, the first $5,000 of such gifts to such person shall not, for the purposes of subsection (a), be included in the total amount of gifts made during such year."

It was held by the Board of Tax Appeals in Seymour H. Knox v. Commissioner, 36 B.T.A. 630, that where the petitioner had created one trust for the benefit of two individuals he was entitled to but one exclusion, the trust being the person constituting the donee within the meaning of the statute. This decision was followed in Katherine S. Rheinstrom v. Commissioner, 37 B.T.A. 308, and was also followed and the same rule announced in Edwin B. Cox v. Commissioner, 38 B.T.A. 865. In numerous other cases the Board of Tax Appeals consistently held that there could be but one $5,000 exclusion where there was but one trust indenture, no matter how many donees might be named in each trust indenture.

Recently, however, the Board in the case of Wilton Rubinstein v. Commissioner, decided January 30, 1940, reversed its position and held where property was conveyed to a trustee for the benefit of the donor's wife and three children that four exclusions of $5,000 each should be allowed, basing its decision on Welch v. Davidson, 1 Cir., 102 F.2d 100; Robertson v. Nee, 105 F.2d 651; Rheinstrom v. Commissioner, 8 Cir., 105 F.2d 642, 124 A.L.R. 861; and McBrier v. Commissioner, 3 Cir., 1939, 108 F.2d 967, 1 Prentice-Hall Federal Tax Service, 1939, ¶ 5.756.

Welch v. Davidson, supra, was an appeal from the judgment of the federal District Court of Massachusetts, in which judgment was awarded plaintiff for gift taxes paid by the plaintiff for the calendar year 1934. In 1934 the plaintiff and his wife created an irrevocable trust, naming the Old Colony Trust Company as trustee, in which plaintiff transferred certain property for the benefit of his seven children. The instrument provides that upon plaintiff's death the proceeds are to be divided in equal shares, one for each of the seven children of the plaintiff then surviving,...