Pettus v. Comm'r of Internal Revenue

• Decision Date: 27 January 1970
• Docket Number: Dockets Nos. 2496-67— 2499-67,5075-67,5076-67.
• Citation: 54 T.C. 112
• Parties: JAMES T. PETTUS, JR., ET AL.,1 PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

54 T.C. 112

JAMES T. PETTUS, JR., ET AL.,1 PETITIONERS

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Dockets Nos. 2496-67— 2499-67

5075-67

5076-67.

United States Tax Court

Filed January 27, 1970.

Donald E. Fahey and William A. Ens, for the petitioners.

Charles B. Tetrick, for the respondent.

Petitioners established identical trusts for the benefit of each of their minor children. Each trust instrument provided that the income of the trust was to be paid to the beneficiary or accumulated as the trustee determined in his uncontrolled discretion. The principal of each trust could be invaded only if the trustee determined that the beneficiary was ‘in need of funds,‘ because of ‘illness, infirmity or disability, either mental or physical.’ The trustee was granted discretion to add accumulated income to the principal, and was also granted other extensive administrative powers. Disposition of the accumulated income and principal of the trusts satisfied the requirements of sec. 2503(c) (2), I.R.C. 1954. Held, petitioners' gifts to the trusts were gifts of present interests to the extent of the value of the income portions thereof and gifts of future interests to the extent of the value of the remainders. Held, further, petitioner June B. Pettus is not liable for additions to the tax under sec. 6651(a), I.R.C. 1954, for the years 1959 through 1963, since her failure to file gift tax returns for those years was due to reasonable cause.

FEATHERSTON, Judge:

Respondent determined deficiencies in petitioners' gift tax and additions to the tax as follows:

+------------------------------------------------------------------+
                ¦                   ¦          ¦     ¦            ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦Additions to    ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦Petitioner         ¦Docket No.¦Year ¦Deficiencies¦the tax,        ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦sec. 6651(a) [2]¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1963¦$1,724.06   ¦$86.20          ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦James T. Pettus, Jr¦2496-67   ¦(1964¦3,269.40    ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1962¦67.50       ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦Philip K. Crowe    ¦2497-67   ¦(1963¦97.50       ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1964¦156.92      ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦5076-67   ¦1965 ¦215.16      ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1962¦675.00      ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦Irene Pettus Crowe ¦2498-67   ¦(1963¦675.00      ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1964¦672.52      ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦5075-67   ¦1965 ¦669.52      ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1959¦321.54      ¦80.38           ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1960¦971.68      ¦242.92          ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1961¦1,340.16    ¦335.04          ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦June B. Pettus     ¦2499-67   ¦(1962¦860.62      ¦215.15          ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1963¦1,240.76    ¦310.19          ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦(1964¦2,685.04    ¦                ¦
                +-------------------+----------+-----+------------+----------------¦
                ¦                   ¦          ¦     ¦            ¦                ¦
                +------------------------------------------------------------------+
                

Respondent has conceded that no addition to the tax is due from petitioner James T. Pettus, Jr., for the year 1963. The issues remaining for decision are:

(1) Whether petitioners' gifts in trust for the benefit of their minor children were gifts of present interests in property under section 2503(b) and (c), so as to entitle each petitioner to an exclusion from taxable gifts of $3,000 per year for each donee.

(2) Whether petitioner June B. Pettus is liable for additions to the tax under section 6651(a) for failure to file gift tax returns for the years 1959 through 1963.

(3) Whether respondent, in the notice of deficiency, correctly computed the gift tax liability of petitioner James T. Pettus, Jr., for the years 1963 and 1964.

FINDING OF FACTS

James T. Pettus, Jr. (hereinafter referred to as Pettus), and June B. Pettus are husband and wife. Their legal residence at the time their petitions were filed was London, England. Pettus filed gift tax returns for 1959 through 1964, and June filed a gift tax return for 1964, with the district director of internal revenue, St. Louis, Mo. June did not file gift tax returns for 1959 through 1963.

Philip K. Crowe (hereinafter Crowe) and Irene Pettus Crowe are husband and wife. Their legal residence at the time their petitions were filed was R.D. 4, Easton, Md. Irene filed gift tax returns for 1962 through 1965 with the district director of internal revenue, St. Louis, Mo. Crowe did not file gift tax returns for those years.

Pettus and Irene made the gifts involved herein, but the gift tax liabilities of their spouses are also at issue because they consented to have the gifts considered as having been made one-half by each of them.

On the dates indicated Pettus orally declared separate, identical, irrevocable trusts for the benefit of his minor children as follows:

+------------------------------------------------------------+
                ¦Date of Declaration  ¦Beneficiary           ¦Date of Birth  ¦
                +---------------------+----------------------+---------------¦
                ¦                     ¦                      ¦               ¦
                +---------------------+----------------------+---------------¦
                ¦Mar. 9, 1956         ¦Winston Albert Pettus ¦Oct. 6, 1955   ¦
                +---------------------+----------------------+---------------¦
                ¦Mar. 11, 1957        ¦Katherine Irene Pettus¦Nov. 13, 1956  ¦
                +---------------------+----------------------+---------------¦
                ¦May 26, 1958         ¦Ruth Eva Pettus       ¦Oct. 27, 1957  ¦
                +---------------------+----------------------+---------------¦
                ¦July 22, 1960        ¦William W. Pettus     ¦July 1, 1960   ¦
                +------------------------------------------------------------+
                

At the time of the creation of each trust, and on various subsequent dates, Pettus transferred certain assets to the trustee of the various trusts.

On April 9, 1962, these trusts were reduced to writing and incorporated into one trust agreement, which provides, in pertinent part, as follows:

ITEM ONE: * * *

(B): Each child of Grantor shall enjoy his or her trust estate in the following manner, that is to say, that the net income of such child's trust shall be paid to and/or used and applied for the benefit of such child until the termination of such trust, in such amount or amounts and at such time or times, respectively, as the Trustee shall determine in his sole judgment and discretion. The decision of the Trustee as to the advisability and amount of any such disbursement shall be conclusive and binding on all parties in interest. Any income of the trust of a child of Grantor not disbursed as above provided shall at such time or times, respectively, as the Trustee determines be added to and administered as a part of the principal of such child's trust hereunder.

(C): If at any time or from time to time it shall appear to the satisfaction of the Trustee that a child of Grantor, shall be in need of funds in excess of the income, which may be then available for such child from his or her trust estate, and if it shall appear to the Trustee that such funds are needed because of illness, infirmity or disability, either mental or physical, of such child, then the Trustee may relieve in whole or in part any such need or needs of such child by paying to such child or using and applying for his or her benefit such sum or sums of the principal of such child's trust estate as the Trustee deems reasonable and proper under the circumstances.

(D): When a child of Grantor herein named reaches twenty-one (21) years of age the trust estate of such child shall terminate and the Trustee shall transfer, convey and deliver to such child, free of trust, all the income and principal of the trust estate of such child then on hand.

(E): If a child should die prior to attaining the age of...