Before BIGGS, MARIS, JONES, GOODRICH, and McLAUGHLIN, Circuit Judges.
The principal question here involved is whether gifts which the petitioner made to his minor children in the taxable years in question were gifts of future interests within the purview of Sec. 504(b) of the Revenue Act of 1932*fn1 and, therefore, not entitled to the specific exclusion allowed by the statute. If that be answered in the affirmative, then a further question becomes pertinent. Was it proper for the Commissioner of Internal Revenue, in computing the petitioner's gift tax liability for the taxable years in question, to readjust and disallow exclusions theretofore allowed for gifts which the taxpayer had made to his minor children in a prior year as to which year the statute of limitations had run so far as the determination and assessment of a deficiency in tax for that year was concerned?
The facts are undisputed and show the following situation.
On December 17, 1936, the taxpayer created a trust for the benefit of each of his five children, three of whom were then minors. By the trust indenture,he appointed a trust company and his two adult children as trustees. He also made an outright gift to his wife in that year. The taxpayer filed a gift tax return for the year 1936 which was duly audited and from which it was determined that he had made gifts in that year to his wife and his five children in an aggregate sum of $71,952.49. The Commissioner allowed six exclusions of $5,000 each (one on account of the gift to the wife and one on account of the gift to each of the five children) and an exemption of $40,000. The taxpayer's net gifts for the year 1936 were accordingly determined to be $1,952.49 upon which a tax was duly assessed and paid.
On March 21, 1937, the taxpayer augmented the corpus of the trust for his five children by adding thereto $5,000 for each child (in the form of shares of stock in a company in which he was interested). At that time three of the children were still minors.
On December 9, 1938, the taxpayer created another trust for the benefit of his five children, the corpus whereof consisted of two tracts of unimproved land valued at $38,581.54. At that time two of the taxpayer's children were still minors, one of the former minors having attained his majority on April 12, 1938. The trustees were the same corporate trustee and the three adult beneficiaries.
The Commissioner disallowed exclusions in the case of the taxpayer's gifts to his three minor children in 1937 on the ground that they constituted gifts of future interests within the intent of Sec. 504(b). And, for like reason, he also disallowed exclusions on the gifts to the two minor children in 1938. In computing the taxpayer's net gifts in 1937 and 1938, subject to tax, the Commissioner also readjusted the taxpayer's gift tax return for 1936 by disallowing the exclusions therein allowed on account of the gifts to the minor children in that year, as to which the statute of limitations had run. The Tax Court sustained the Commissioner's determination and the present petition for review followed.
The 1936 and 1938 trust instruments do not differ materially so far as the interests given the minors and the powers ocnferred on the trustees are concerned. Only typical pertinent provisions need, therefore, be quoted.
As to the gift to a minor, paragraph Second, subparagraph 3, of the 1936 trust instrument provided: "3. As to the third of said equal shares of principal, to accumulate the net income therefrom for the benefit of William L. Disston until he reaches the age of twenty-one years, at which time to pay over to him all accumulated income, and thereafter to pay over to him in not less than quarterly instalments the entire net income derived therefrom during his lifetime; provided, however, that upon his reaching the age of forty-five years one-half of the principal of his share shall be paid over to him free and discharged of all trusts; and upon further trust upon his death whether befor eor after reaching the age of forty-five years, to divide the principal of his share, or such portion thereof as is then held by the Trustees, among his then living descendants (including children, if any, legally adopted by him or his descendants) in such amounts ass he shall by will appoint, and in default of such appointment, to divide the same equally per stirpes among such of his said descendants as are living at the time of such distribution, and in default of such descendants then living, to divide the principal equally per stirpes among such of Settlor's other children and their descendants (including children, if any, legally adopted by any of them) as are then living; provided, however, that if said son shall die before reaching the age of forty-five years, the said powers of appointment shall be subject to the right of the said son to appoint to his wife during her lifetime or for any shorter period such portion of the annual net income from his share of principal as he may elect, not to exceed, however, one-half, of such income."
The gifts to the other two minors (daughters) were in the same terms as the above except that each of the minor daughters was to receive one-third, instead of one-half, of the principal of her gift upon reaching the age of forty-five.
As to the trustees' powers with respect to the gifts to the minors, paragraph Second, subparagraph 6, provided as follows: "6. Trustees shall hold the shares of minors in whom the principal shall have vested during their respective minorities, and during such time shall apply such income therefrom as may be necessary for the education, comfort and support of the respective minors, and shall accumulate for each minor until he or she reaches the age of twenty-one years, all income not so needed. The foregoing clause shall apply to minor children of the Settlor irrespective of the direction heretofore set forth to accumulate all income for such minors. In the administration of the shares of the minors, the Trustees shall have all of the powers, duties and discretions, including the power of investment and reinvestment, as are conferred upon them as Trustees hereunder."
Paragraph Fourth, subparagraph 7, further directed the trustees, - "7. To apply the income to which any beneficiary shall be entitled hereunder for the maintenance, education and support of such beneficiary should he or she by reason of age, illness or any other cause in the opinion of the Trustees be incapable of dispensing it. Payment by the Trustees to the parent of any minor or to the person with whom such minor resides and the receipt of such ...