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Commissioner of Internal Revenue v. Allen.

December 22, 1939

COMMISSIONER OF INTERNAL REVENUE
v.
ALLEN.



Petition by the Commissioner of Internal Revenue to review a decision of the Board of Tax Appeals redetermining a deficiency in the tax imposed by the Commissioner against Dorothy A. D. Allen.

Author: Jones

Before BIDDLE, JONES, and BUFFINGTON, Circuit Judges.

JONES, Circuit Judge.

The question in this case is whether a minor's transfer of property, without valuable consideration, in trust for others, made prior to the effective date of the Gift Tax Act of 1932, is so inchoate and imperfect, because of the minor's legal right to disaffirm during minority and for a reasonable period thereafter, as to render the transfer not taxable as a gift until the year in which the minor attained majority, having failed to disaffirm.

The Board of Tax Appeals, agreeing with the taxpayer's contention, held that the transfer was complete as an executed gift at the time the trust was created; that the minor settlor's right to disaffirm was not the vested power "to revest in the donor title to such property" contemplated by Section 501(c) of the Revenue Act of 1932, 26 U.S.C.A. ยง 550 note; and that the gift was, therefore, not subject to tax.It is that decision which we now have for review on the petition of the Commissioner of Internal Revenue.

The material facts in the case are as follows:

On June 4, 1932, Dorothy Anne Dillon (now Dorothy A. D. Allen, the respondent), a resident of New Jersey, made a transfer in trust by executing and delivering an indenture transferring the securities specified therein, and in accordance with its terms, to the trustees named in the indenture. On the same date, the trustees, consisting of the settlor's father, her brother and a certain bank, qualified to act as trustee in New Jersey, accepted the trust. At the time of making the trust, the settlor was a minor and did not attain her majority until October 9, 1933.*fn1

By the terms of the indenture the entire net income of the trust estate was made payable to the settlor's father for life, then to her mother for life, and then to her brother for life, with remainders over in the income, for a time, and, later, in the corpus to the children and the issue of any deceased children of the brother, and, failing such, then to the children and the issue of any deceased children of the settlor.

The indenture also provides that the trust shall be governed in accordance with the laws of New Jersey.

The transfer appears to be absolute on the face of the indenture which contains no express reservation of power, on the part of the settlor, to revoke or amend the trust.

Under the law of New Jersey, as elsewhere generally in this country, a minor has the legal right to avoid his contracts and conveyances.Such right endures for a reasonable time after the minor has reached his majority. What constitutes a reasonable time after majority for an act of disaffirmance, being ordinarily a question of fact, usually depends on the circumstances of the particular case. For a recent tabulation of the rules in various States, see Spencer v. Lyman Falls Power Co., 109 Vt. 294, 196 A. 276, 278.

The Court of Chancery of New Jersey has held that the time within which the acts of a minor may be disaffirmed after majority may extend for the periods prescribed by the New Jersey statute of limitations for actions real and actions personal, respectively, although the right to disaffirm may be lost earlier by conduct on the part of the emancipated minor amounting to ratification or constituting an estoppel to disaffirmance. Mott v. Iossa, 119 N.J.Eq. 185, 192, 181 A. 689. Unquestionably, the respondent in the instant case, by disaffirming, could have avoided her transfer of June 4, 1932, and thereby have revested in herself title to the trust property, at any time until she attained her majority on October 9, 1933, and for some period of time thereafter.

The Commissioner, deeming that the transfer became cosummate as a gift on October 9, 1933, when the settlor attained her majority and failed to disaffirm, and that it was therefore taxable under Section 501*fn2 of the Revenue Act of 1932, requested the respondent to file a gift tax return for 1933 reflecting the transfer. This, the respondent did, at the same time denying any liability for tax on account of the gift. The gift tax provisions of the Revenue Act of 1932 did not become effective until June, 6, 1932, two days after the execution and delivery of the respondent's trust deed.

The decision in Burnet v. Guggenheim, 288 U.S. 280, 53 S. Ct. 369, 370, 77 L. Ed. 748, controls this case. What was said there, with respect to the unreality and mere formality of a "gift" where a power to revoke is vested in the donor, applies with equal force here. Throughout the donor's minority, her transfer remained "inchoate and imperfect". It was not until she attained her majority and failed to disaffirm that her undeniable and absolute power to nullify the transfer and to revest in herself title to the trust property ...


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