Rheinstrom v. Commissioner of Internal Revenue, 11265.

• Decision Date: 26 June 1939
• Docket Number: No. 11265.,11265.
• Citation: 105 F.2d 642
• Parties: RHEINSTROM v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — Eighth Circuit

105 F.2d 642 (1939)

RHEINSTROM v. COMMISSIONER OF INTERNAL REVENUE.

No. 11265.

Circuit Court of Appeals, Eighth Circuit.

June 26, 1939.

Donald F. Pratt, of Minneapolis, Minn. (Guesmer, Carson & MacGregor, of Minneapolis, Minn., on the briefs), for petitioner.

Louise Foster, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key and Harry Marselli, Sp. Assts. to Atty. Gen., on the briefs), for respondent.

Before GARDNER, SANBORN, and WOODROUGH, Circuit Judges.

SANBORN, Circuit Judge.

This is a petition to review a decision of the Board of Tax Appeals (37 B. T. A. 308) redetermining a deficiency in gift taxes of the petitioner for the year 1934, under the Revenue Act of 1932.¹

The facts are not in dispute. On November 7, 1934, the taxpayer executed and delivered a trust instrument to three trustees, irrevocably transferring to them, in trust, personal property of the value of $205,222.27. The trust was created for the benefit of the taxpayer and her four children. By its terms, she retained a life interest in 40% of the entire net income. The trustees were directed to pay to her son Stewart H. Clifford 12½% of the entire net income. They were directed to hold 12½% of such income for the benefit of her son Benjamin B. Clifford, but with the discretion to pay over to him only so much thereof as might to them seem best, and with power to pay all or a portion thereof to his wife "and/or" children; any unexpended portion of such income to be invested for his benefit "and/or" that of his wife and children. The trustees were directed to hold 12½% of such income for the benefit of the taxpayer's son Arthur F. Clifford upon the same terms and conditions as were applicable to Benjamin B. Clifford. The trustees were directed to hold 12½% of such income for the benefit of the taxpayer's daughter, Katherine Clifford, with discretion to pay over only so much of the income to her as to them seemed best, and to invest any unexpended balance for her benefit. The remaining 10% of the net income was to be accumulated, invested and held "as a reserve fund, with absolute power and discretion in said trustees to pay over to" the taxpayer, "during her lifetime, such part, if any of this 10% of the entire net income of said trust, and accumulations, if any, thereon, as may to said trustees seem best, and with absolute power and discretion in said trustees, after the death of" the taxpayer, "to pay over to the children of" the taxpayer, "or to their successors in interest as hereinafter provided, such part, if any, of this 10% of the entire net income of said trust and accumulations, if any, thereon, as may to said trustees seem best * * *."

In her gift tax return for the year 1934, the taxpayer, in the belief that in creating this trust she had made four gifts — one to each of her four children — excluded $20,000 by virtue of Section 504(b). (See footnote 1.) She also assumed, in making her return, that she had retained a life interest in 50% of the income from the property transferred in trust. She paid her tax upon that basis.

The Commissioner of Internal Revenue determined that the taxpayer's gifts to three of her children were of "future interests", and that she was entitled to but one exclusion of $5,000, which was on account of the unconditional gift to her son Stewart. The Commissioner also determined that she had not retained a life interest in the "reserve fund", but had such an interest in only 40% of the income of the trust estate.² This action of the Commissioner resulted in the deficiency complained of.

The taxpayer petitioned the Board of Tax Appeals for a redetermination. Before the Board, apparently only two questions were presented: (1) Did the transfer by the taxpayer to the trust which she created constitute a single gift entitling her to one exclusion of $5,000, or did it constitute four gifts, one to each of her four children, who were the beneficiaries of the trust? (2) Did the taxpayer retain a legal or equitable interest in the "reserve fund" set up by the trust instrument? The Board ruled that the taxpayer had made but a single gift, of which the trust was the donee, and that she had retained no interest in the reserve fund which could be considered in determining her gift tax.³

Three questions are presented to this Court for decision:

1. Did the transfer in trust constitute one gift to the trust or four gifts to the beneficiaries?

2. If it constituted four gifts, were three of them gifts of "future interests"?

3. Did the taxpayer retain an interest in the reserve fund which should have been taken into consideration in computing her tax liability?

1. In support of his contention that the taxpayer made a single gift to her trust, the Commissioner cites Commissioner v. Wells, 7 Cir., 88 F.2d 339, and Commissioner v. Krebs, 3 Cir., 90 F.2d 880. The question considered in those cases was whether certain gifts in trust were gifts of present or of future interests. In the Wells case, the court, in discussing that question, said (page 341 of 88 F.2d):

"Under the undisputed evidence all the elements of a consummated gift were present. With respect to the donor the transfer was not in futuro. He thereby divested himself of all vestige of title, and no future act on his part could modify or abrogate his act. Likewise, the donees were competent to accept the gifts, and they did so immediately. True they were trusts, but they were no different from persons, for the Act so states. They took immediate title to and possession of all the property from the donor; they put it to instant use for the directed purpose of building up an estate for the ultimate and contingent beneficiaries, who were named specifically. The fact that those beneficiaries did not come into possession of the corpus until some time in the future, dependent upon some contingency, does not make the donor's act any the less a completed transfer to the trustees. The fact must not be overlooked that the Act involved relates to transfers and not receipts."

In the Krebs case, the court said (page 881 of 90 F.2d):

"We are of the opinion that the gifts were gifts of a present interest, whether the test used be the nature of the interest which the donor gave, or the nature of the interest which the trustees or the cestuis que trusts received. Since the statute imposes the tax upon the donor, it seems pertinent to determine whether the interest which the donor gave was a present or future interest rather than to determine the quality of the estate received by any particular beneficiary. It is clear that the donor parted completely with the subject-matter of the gifts, including all right, title, and interest in possession or enjoyment, at the time of making the transfer. We think it clearly appears, when we consider that the donor, after the gifts were made, had no longer any interest whatever, present or future, in the stock and funds donated, that the gifts were of a present interest.

"Assuming, however, that the nature of the gifts is to be considered from the stand-point of the character of the interests received rather than that of those given, the trustees undoubtedly took present interests. Inasmuch as the term `person' is defined by section 1111 of the act to include a trust or estate, the trust estates here involved must be held to be those persons to whom the gifts were made within the meaning of section 504(b). That is the reason assigned for a similar conclusion by the Seventh Circuit in Commissioner of Internal Revenue v. Wells (C.C.A.) 88 F.2d 339.

"We are further of the opinion that tested by the nature of the gifts to the cestuis que trusts, the donor was entitled to the deduction. The donees were named, the respective values of the gifts to them were ascertainable, and they were given the use of the income and of the unexpended accumulated income without an intervening estate, even though physical possession was postponed."

It is to be noted that in the Wells case, the court held that the trust was the donee of the gift; while in the Krebs case the court, after expressing the same view, ruled that the gifts there in question were gifts of present interests, whether regarded as having been made to the trust or to the beneficiaries.

In this connection, it is interesting to note that in his letter to the taxpayer, written on January 30, 1936, the Commissioner does not refer to the trust as the donee of the taxpayer, but refers to the beneficiaries of the trust as the donees. The Wells case was decided February 22, 1937. The taxpayer had filed her petition on August 7, 1936, for a redetermination of the deficiency determined by the Commissioner, and the decision of the Board was promulgated February 9, 1938. It is obvious that the Commissioner was originally of the opinion that this taxpayer had made four gifts to her children, three of which he regarded as gifts of future interests. It is apparent that the Wells case is the basis for the doctrine, adopted by the Commissioner and by the Board of Tax Appeals, that a transfer in trust such as that here involved constitutes a gift to a trust.⁴

The taxpayer relies upon Davidson v. Welch, D.C.Mass., 22 F.Supp. 726; Welch v. Davidson, 1 Cir., 102 F.2d 100, affirming Davidson v. Welch; and Ryerson v. United States, D.C., N.D.Ill., 28 F.Supp. 265, decided March 31, 1939, 1939 C. C. H. Federal Tax Service, Vol. 4, par. 9485. The Commissioner concedes that these cases sustain the contention of the taxpayer that she made four gifts, but is of the opinion that the cases were not correctly decided.

The following excerpts from the opinion in the case of Welch v. Davidson, supra, indicate the views of the United States Circuit Court of Appeals for the First Circuit with respect to the question under consideration (page 102, 103 of 102 F.2d):

"It must be conceded that in equity the beneficiary of a trust is the owner of the trust res; that he has an equitable estate in...