Welch v. Davidson, 3408.

• Decision Date: 02 March 1939
• Docket Number: No. 3408.,3408.
• Citation: 102 F.2d 100
• Parties: WELCH, Collector of Internal Revenue, v. DAVIDSON.
• Court: U.S. Court of Appeals — First Circuit

102 F.2d 100 (1939)

WELCH, Collector of Internal Revenue, v. DAVIDSON.

No. 3408.

Circuit Court of Appeals, First Circuit.

March 2, 1939.

Jerome P. Carr, Sp. Asst. to Atty. Gen. (James W. Morris, Asst. Atty. Gen., and Sewall Key, Sp. Asst. to Atty. Gen., on the brief), for appellant.

Earle W. Carr, of Boston, Mass. (J. Alex. Lane and Gaston, Snow, Hunt, Rice & Boyd, all of Boston, Mass., on the brief), for appellee.

Before BINGHAM and WILSON, Circuit Judges, and BREWSTER, District Judge.

BINGHAM, Circuit Judge.

This is an appeal from a judgment of the federal District Court for Massachusetts in favor of the plaintiff. The action is to recover gift taxes paid by the plaintiff for the calendar year 1934, assessed as an additional tax in the amount of $1,272.26.

The facts are not in dispute. It appears that on January 18, 1934, the plaintiff and his wife created an irrevocable trust, and the plaintiff transferred to the Old Colony Trust Company, as trustee, three life insurance policies on his life, which had a cash surrender value of $37,740.05 (the policies of the wife are not here involved); that in the trust instrument it was provided that on the plaintiff's death the trustee was to collect the proceeds of the policies and divide them into equal shares, one to each of the plaintiff's seven daughters then surviving, and pay the income of each share to the daughter for whom it was held, for life; that one-half of the principal of each share was to be distributed when the beneficiary reached the age of 45 years, provided that at least ten years had elapsed after the plaintiff's death; that following the establishment of the trust and during the year 1934, the plaintiff paid the premiums on the policies in the amount of $20,971.25; and that in that year he made an outright gift to his daughter Elizabeth (one of the beneficiaries of the trust) of a home worth $20,000.

In his gift tax return for 1934 the plaintiff included all of the above gifts and claimed total exclusions of $35,000, of which $5,000 represented the first $5,000 of the value of the home given to Elizabeth and the remaining $30,000 represented an exclusion of $5,000 for each of the gifts in trust made to the other six children.

The Commissioner disallowed the exclusion of $30,000 with respect to the gifts in trust on the ground that the interests conveyed were future interests, assessed a deficiency of $1,272.26, which was paid and this suit brought.

In the District Court judgment was rendered for the plaintiff on the ground that the gifts were of present interests; that the beneficiaries of the trust, and not the trustee, were the donees; and that an exclusion of $5,000 to each of the six beneficiaries was proper.

The government has taken no assignment of error to the ruling of the District Court that the gifts were of present interests. The assignments on which it relies are (1) that the court erred in holding that each beneficiary named in the trust indenture is a donee within the provisions of Section 504(b) of the Revenue Act of 1932, as amended, 26 U.S.C.A. § 553(b); and (2) in denying the defendant's request for a ruling of law that under the trust indenture of January 18, 1934, the trustee is the donee, within the provisions of Section 504(b) of the Revenue Act of 1932, as amended.

The applicable provisions of the Revenue Act of 1932 are:

"Sec. 501. Imposition of tax.

"(a) For the calendar year 1932 and each calendar year thereafter a tax, computed as provided in Section 502 section 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; * * *." 26 U.S.C.A. § 550 (a, b).

"Sec. 504. Net gifts.

"(a) General definition. The term `net gifts' means the total amount of gifts made during the calendar year, less the deductions provided in Section 505 section 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." 26 U.S.C.A. § 553(a, b).

The government in its brief concedes that the taxpayer is entitled to one exclusion of $5,000, but contends that, as there was only one trust, there was only a single gift and that was to the trustee as donee. It overlooks the agreed facts wherein it was stipulated that $5,000 of the total exclusion of $35,000 "represented the first $5,000 of the value of the home given to the daughter Elizabeth, as to which it is conceded the taxpayer was entitled to an exclusion;" so that, in any event, the plaintiff is entitled to an exclusion of $10,000.

The real question here, however, is whether the other six daughters named in the trust instrument as beneficiaries are donees or whether the trustee who took the legal title to the trust res is the donee.

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 the property constituting the trust and is considered the real owner; that the trustee, on the other hand, holds the legal title to the property with the right to administer it for the benefit of the beneficiary and in accordance with the terms of the trust; and that a gift, whether it is a direct one or an indirect one through the instrumentality of a trust, is the transfer of property with donative intent.

We think it is plain enough that a beneficiary under an irrevocable trust, who takes a present interest (which it is conceded the beneficiaries in this case did), is the donee on whom the donor intended to bestow his bounty and that the trustee, to whom he conveys the legal title devoid of any beneficial interest, is not. Does the Revenue Act of 1932 call for a different interpretation?

In the Revenue Act of 1924, imposing a gift tax, Section 319, 43 Stat. 313, provides:

"Sec. 319. For the calendar year 1924 and each calendar year thereafter, a tax equal to the sum of the following is hereby imposed upon the transfer by a resident by gift during such calendar year of any property wherever situated, whether made directly or indirectly, and upon the transfer by a nonresident by gift during such calendar year of any property situated within the United States, whether made directly or indirectly." (Italics supplied.)

Then follow provisions for determining the amount of the tax.

The provisions of that Act imposing a tax upon transfers by gift do not differ materially from those of Section 501(a) and (b) of the Revenue Act of 1932. In fact...