Stockstrom v. Commissioner of Internal Revenue, 10744.

• Decision Date: 29 March 1951
• Docket Number: No. 10744.,10744.
• Citation: 190 F.2d 283
• Parties: STOCKSTROM v. COMMISSIONER OF INTERNAL REVENUE.
• Court: U.S. Court of Appeals — District of Columbia Circuit

190 F.2d 283 (1951)

STOCKSTROM v. COMMISSIONER OF INTERNAL REVENUE.

No. 10744.

United States Court of Appeals District of Columbia Circuit.

Argued November 14, 1950.

Decided March 29, 1951.

Chase Morsey, St. Louis, Mo., for petitioner.

Loring W. Post, Sp. Asst. to the Atty. Gen., with whom Messrs. Ellis N. Slack and Lee A. Jackson, Sp. Assts. to the Atty. Gen., were on the brief, for respondent. Charles Oliphant, Chief Counsel, Bureau of Internal Revenue, and Charles E. Lowery, Sp. Atty., Bureau of Internal Revenue, Washington, D. C., also entered appearances for respondent.

Before CLARK, WILBUR K. MILLER and PRETTYMAN, Circuit Judges.

WILBUR K. MILLER, Circuit Judge.

The Revenue Act of 1932 provided with respect to gift taxes an exemption or "exclusion" of $5,000 in the case of gifts other than of future interests in property. A gift tax return was not required of a donor whose gift fell within that exemption.¹

On January 6, 1936, Louis Stockstrom established ten irrevocable trusts and made a gift of less than $5,000 to each; but, as the Commissioner of Internal Revenue was then ruling that gifts to trusts were gifts of future interests not entitled to the statutory exclusion, Stockstrom filed gift tax returns covering his gifts to the ten trusts, claimed no exclusions, and paid the taxes disclosed thereby. He attached to the tax returns copies of the declarations of trust. Had he claimed and been entitled to the exemption or exclusion, no taxes would have been due, for the reason that each gift was less than $5,000; and no gift tax returns would have been required.

Thereafter other taxpayers similarly situated tested the Commissioner's ruling that gifts to trusts were gifts of future interests by appealing to the Board of Tax Appeals. It was there held, in a number of such cases, that gifts to trusts were gifts of present interests in property to which the exemption or exclusion was applicable.

In response to the Commissioner's petition for review of one of these decisions, the Seventh Circuit handed down on February 22, 1937, an opinion in Commissioner of Internal Revenue v. Wells, 7 Cir., 88 F.2d 339, 341, in which it held that the trusts were the donees; that "They took immediate title to and possession of all the property from the donor; they put it to instant use for the directed purpose * * *" and, consequently, that such gifts are transfers of present interests.

In Commissioner of Internal Revenue v. Krebs, 90 F.2d 880, 881, decided by the Third Circuit on June 4, 1937, Krebs had established an irrevocable trust for each of his three children. The trustee was directed to use the income for the support, maintenance, benefit and education of the child until he reached the age of twenty-five. Unexpended income was to be paid directly to the beneficiary but no beneficiary had any right to the income until the trustee paid it to him. The donor, in making gift tax returns, deducted $5,000 from the value of each gift. The Commissioner held they were gifts of future interests and disallowed the exclusions. The Board of Tax Appeals held the gifts were of present interests. On appeal, the Third Circuit was 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." The court thought that, since the tax was imposed upon the donor and since in that case "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." The court went on to say, however, that if the test be to determine the character of the interest of the donee, the trustees undoubtedly took a present interest, citing Commissioner of Internal Revenue v. Wells, supra.

Without petitioning the Supreme Court for certiorari (the appellant says, for the reason that the Solicitor General advised him the rulings were correct), the Commissioner "acquiesced"² in the Wells and Krebs decisions, thus instructing taxpayers and his own staff to regard them as precedents in the disposition of other cases.

By this acquiescence the Commissioner of Internal Revenue reversed his former ruling that gifts to trusts were gifts of future interests not entitled to an exclusion, and held that under the statute a gift to a trust is a gift of a present interest if the trustee immediately takes and enjoys the property.

Obviously, if this new ruling made in 1937 had been in effect in 1936, Stockstrom would have owed no gift taxes with respect to the gifts made to the ten trusts which he established in that year, and would not have been required even to file returns, as each gift was within the exempted amount. Consequently, on March 18, 1937, and February 4, 1938, Stockstrom filed claims for refund of the gift taxes paid for the calendar year 1936, pointing out that "No $5,000 exclusion was allowed as provided by Section 504(b) of the Revenue Act of 1932 for the gifts made by irrevocable trust agreement (a copy of which was attached to the 1936 gift tax return)." The Commissioner allowed the claims for refund and the Treasury returned to Stockstrom the sum of $4,218.61 which he had paid as taxes on the 1936 gifts.

Stockstrom made additional gifts to the trusts in 1937, filed gift tax returns and, relying upon the Wells case and the Commissioner's new ruling pursuant thereto, claimed an exclusion of $5,000 on each gift. On August 11, 1938, after examining the 1937 returns, the Deputy Commissioner of Internal Revenue wrote the taxpayer stating a small deficiency in his gift tax liability for 1937, resulting from an increase in the valuation of certain items and an error in addition; but the claim to exclusions was not disallowed.

During the year 1938 Stockstrom made still more gifts to the trusts, but as each was less than $5,000 he filed no gift tax return. No doubt he felt quite secure because of the judicial holdings that such gifts were of present interests, because of the Commissioner's acquiescence therein, and because of the Commissioner's conduct in refunding the 1936 payments and in approving the 1937 returns in which exclusions were claimed. And, if his 1938 gifts were of present interests as he had thus been assured they were, he owed no duty to file returns with respect to them as each was under $5,000.

The holdings of the Board of Tax Appeals, the courts, and subsequently the Commissioner of Internal Revenue that a gift to a trust was to the trust itself and not the beneficiary thereof were greatly to the advantage of the government in situations in which several beneficiaries took present interests, under one trust agreement, as only one exclusion of $5,000 was allowable since the trust itself was held to be the donee.

But the Commissioner was not satisfied with this advantage. He proposed to Congress that the Revenue Act of 1932 be amended so as to deny an exemption or exclusion to any gift made to a trust. In accordance with his suggestion there was inserted in the Revenue Act of 1938 a provision that the exclusion (then reduced to $4,000) should not apply to gifts in trust or of future interests in property. It was expressly provided that the denial of the exemption to gifts in trust should be applied to the computation of the tax for the calendar year 1939 and each calendar year thereafter, "but not the tax for the calendar year 1938 or a previous calendar year."³

The report of the Senate Finance Committee (S.Rep. No. 1567, 75th Cong., 3d Sess., p. 41; 1939-1 Cum.Bull. (Part 2) 779, 809) concerning the amendment of 1938 included the following: "* * * The committee is also proposing an amendment by which the exclusion would not apply to gifts in trust. The Board of Tax Appeals and several of the Federal courts⁴ have held, with respect to gifts in trust, that the trust entities were the donees and on that account the gifts were of present and not of future interests. The statute, as thus construed, affords ready means of tax avoidance, since a donor may create any number of trusts in the same year in favor of the same beneficiary with a $5,000 exclusion applying to each trust, whereas the gifts, if made otherwise than in trust, would in no case be subject to more than a single exclusion of $5,000. The proposed change does not reduce the $4,000 specific exemption for gifts. The amendment will apply only when computing the tax for the calendar year 1939 and succeeding calendar years."

The Congress thus recognized the judicial interpretation of its 1932 Act and, instead of manifesting an intention to disagree with or disturb that construction, was careful to provide that the amendment should "be applied in computing the tax for the calendar year 1939 and each calendar year thereafter (but not the tax for the calendar year 1938 or a previous calendar year), * * *."⁵

In 1941 — exactly when in that year the record does not disclose — a revenue agent investigating the income taxes of Louis Stockstrom discovered the facts and figures concerning the gifts in trust made in 1938 and observed that no gift tax return had been filed with respect to them. The revenue agent and Stockstrom's representative went together to see the head of the Federal Estate and Gift Tax Section of the Office of the Bureau of Internal Revenue in St. Louis, and directed his attention to the fact that no gift tax return had been filed covering the gifts made in 1938 by Stockstrom to the several trusts, each of which was under $5,000.

The Bureau official stated to the revenue agent and to Stockstrom's representative that, if a gift tax return had been filed by Stockstrom for the year 1938, there would have been no tax due. It followed, of course, that, if no tax was due because the gifts were within the exemptions, a tax return was not required to be filed. Because of this assurance given by the...