T.C. Mem o. 2 01 5- 64

UNITED STAT ES TAX COURT ISRAEL MIKEL, Pet it io ne r v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

ERNA MIKEL, Peti ti on er v . COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 1 65 38 -1 3, 1 65 63 -1 3. Fi le d Ap ril 6, 2 01 5.

Stua rt M . Sch ab es , forpe ti ti on ers . Mi ch ael A. Raik en , for

res po nd en t.

MEMORANDUM OPINION LAUBER, Ju dg e: Pet it io ne rs inth es e co ns ol id at edcas es , Isr ael an d Ern a Mi ke l, ar e hus ba ndan d wi fe. W ith re sp ectto th ei r Fed eral gi ft t ax li ab il it ie s fo r 20 07 , th e In te rn al Rev enue Serv ic e (IR S o r res po nd en t) d et erm in edag ai ns t ea ch- 2 -

[* 2] pe ti ti on er a t ax de fic ie nc y of $ 26 8,9 50 an d alat e-fi li ng ad di ti onto tax un de r se ct io n 6 65 1( a)(1 ) of

$6 7,2 38 . 1 Dur in g 2 00 7 e ach pe ti ti on er m ad e to a fam il y tru sta gi ft wi th anass ert ed va lu e o f $1 ,63 1,0 00 . In Dec em be r 20 11 pe ti ti on ers fil edsep arat e g ifttax returns rep orti ng th es e g ift s; each pe ti ti on er cl ai m edun de r se ct io n 2 50 3( b) anan nu al ex cl us io n o f $7 20 ,00 0. Th e cl ai m edannu al ex cl us io ns of $ 72 0,0 00 were b as edon th e co nt en ti on th ateachpe ti ti on er’s g iftin cl ud eda $1 2,0 00 gi ft o f a p res en t in te res t t o e ach of t he tru st ’s 60 be ne fic ia rie s. Inord er fo r a d on or

to qu al ify for thi s an nu al ex cl us io n, the do ne e m us t rece iv e a “pr es en t i nt eres t i n p ro pe rty,” th atis , an u nr es tri ct edrig htto th e imm edi at e u se , po ss es si on , or e njo y m en t o f pr op erty . Sec. 2 50 3( b) ; s ec. 2 5.2 50 3- 3( a) an d (b ), GiftTax R eg s. Th e IRS di sa ll owe d t he cla im edex cl us io ns , det erm in in g th atth e b en efi ci ari es lac ke d l eg al ly enfo rceabl e ri gh ts to withd raw fu nd s fr om th e tru stan d h en ce tha t p et it io ne rs ha d m ad e g ift s o f fu tu re, n otpre se nt , in te res ts . The pa rti es ha ve fil edcro ss -m ot io ns forpa rti al su m m ary jud gm en t o n t hi s qu es ti on . W e co nc lu de th atpe ti ti on ers , du rin g 2 00 7, m ad e g ift s o f pr es en t Unl es s o th erwi se in di cat ed , all st atut ory refe ren ces are t o t he Int ern al Rev e- 1 nu e Co de ineffe ctforth e ta x year atis su e, an d a ll Ru le refe ren ces are t o t he Tax Co urt Ru le s o f Prac ti ce an d P ro cedur e. W e ro un d a ll m on et ary am ou nt s t o t he ne ares t d ol la r.- 3 -

[* 3] in te res ts inpro pe rty. W e wil l ac co rd in gl y de ny resp on de nt ’s m ot io n fo r pa rti al su m

m ary jud gm en t an d g ran t p et it io ne rs ’ m ot io n fo r pa rti al su m m ary jud gm en t t o t he ex te ntdi sc us se d b el ow. Bac kg ro un d The fol lo win g fa ct s ar e d eem edest ab li sh edforpu rp os es of rul in g o n t he cro ss -m ot io ns for

pa rti al su m

m ary jud gm en t. The se fact s ar e d eri ve d fr om th e pa rti es ’ pl ead in gs an d m ot io n p ap ers , in cl ud in g t he att ach edaffi da vi ts an d ex hi bi ts . Peti ti on ers res id edinNew Yorkwhen th ey fil edth ei r pe ti ti on s. The Fam il y

Trus t On J un e 7 , 20 07 , pet it io ne rs as g ran to rs an d S al om on Mi ke l as tru st ee ex ecu te d ade cl arat io n o f tr

us t (d ecl arat io n) est ab li sh in g t he IEM Fam il y Trus t (t ru st ), anirr ev oc ab le in te r vi vo s tru st . The tru st ’s ben efi ci ari es were p et it io ne rs ’ ch il dr en an d l in eal de sc en da nt s an d t he ir r es pe ct iv e sp ou se s. OnJu ne 15 , 20 07 , pet it io ne rs joi nt ly tran sf

erre d t o t he tru stpro pe rty with anass ert edva lu e o f $3 ,26 2,0 00 . The tru stat t he ti m e al le ge dl y ha d 6 0 b en efi ci ari es , m an y of wh om were und er 1 8 y ears of a ge . Arti cl e V of

th e d ecl arat io n, capt io ne d “ Ri gh t o f Ben efi ci ari es to W ithd raw Pri nc ip al ,” gr an te d e achbe ne fic ia ry th e p owe r, du rin g t he y ear i n wh ic h the tru st was create d a nddu rin g any sub se qu en t year when pro pe rty was ad de d, “ to with-- 4 -

[* 4] dr aw pr op erty

fro m th e Tru stin cl ud in g t he pro pe rty tran sf erre d.” The am ou nt“ subjec t t o apo wer o f withd rawal by each b en efi ci ary” was li m it ed an nu al ly to the les se r of

a fo rm ul a-d eri ve d a m ou ntan d “ [t]he m ax im um fed eral gi ft t ax ex cl us io n u nd er s ect io n 2 50 3( b) * * * i n e ffec t atth e ti m e o f th e tr an sf er.” Decl arat io n a rt. V(a ). Becaus e th e fo rm ul a-d eri ve d a m ou ntex ceed edth e m ax im um ex cl us io n u nd er s ect io n 2 50 3( b) , th e la tt er was th e o pe rat iv e li m it at io n in 20 07 . W ithi n areas on ab le ti m e aft er the co nt rib ut io n o f pr op erty to th e trus t, the tru st ees were re qu ire d t o n ot ify all be ne fic iarie s, an d t he gu ard ia ns forall m in or be ne fic ia rie s, tha t the tru stha d re cei ve d p ro pe rty “ as to whi chth e b en efi ci ary ha s a d em an d ri gh t.” Th e d em an d ri gh t was requi redto be ex erci se d i n wri ti ng by the be ne fic ia ry

or t he be ne fic ia ry ’s gu ard ia n a ndge ne ral ly lap se d i f no t ex erci se d withi n 3 0 d ay s o f su chno ti ce. The de cl arat io n s ta te s tha t the tru st ees , up on rece ip t o f a t im el y

withd rawal de m an d, “ sh al l i m m ed ia te ly dis tri bu te to su chbe ne fic ia ry or Gu ard ia n t he pro pe rti es all oc ab le to th em , free o f trus t.” Di st rib ut io ns co ul d b e m ad e in cas h o r pr op erty or b y “bo rro win g fu nd s an d d is tri bu ti ng su ch fund s i n s at is fact io n o f th e d em an d.” Decla rat io n a rt. V(b ). The d ecl arat io n in st ru ct s tha t arti cl e V sh al l b e co ns tru edto effe ctth e g ran to rs ’ in te nt io n t ha t- 5 -

[* 5] “ tra ns fers to th e trus t * * * [qu al ify] forth e fed eral gi ft t ax an nu al ex cl us io n.” Id . art . V(f). Apa rt f ro m di rect in g m an da to ry

di st rib ut io ns inres po ns e to withd rawal de m an ds , th e trus t em

po weredth e trus te es , “ in th ei r so le an d abs ol ut e d is cret io n,” to m ak e d is cret io na ry

di strib ut io ns du rin g t he term of the tru st . Suc h d is tri bu ti on s co ul d b e m ad e fo r th e h eal th , edu cat io n, m ai nt en an ce, o r supp ort o f an y be nefi ci ary orfam il y

m em be r. Suc h d is tri bu ti on s co ul d a ls o b e m ad e, in th e trus te es ’

“ ab so lu te an d u nr ev ie wab le di sc ret io n,” to ass is t a b en efi ci ary in de fraying “ reaso nabl e wed di ng co st s, * * * pu rch as in g apri m ary res id en ce, o r * * * en te rin g a tra de or p ro fes si on .” Inex erci si ng th is di sc ret io n t he tru st ees were em po weredto di st rib ut e “ atan y

ti m e an d fr om

ti m e to ti m e, an y

am ou ntof i nc om e o r pr in ci pa l (ev ento th e ex te ntof a ll ).” The de cl arat io n s pe ci fie s tha t “ [t]he jud gm en t o f th e Trus te es as t o t he am ou nt s o f su chpa ym en ts an d t he advi sabi li ty the reo f sh al l b e fin al an d c on cl us iv e” upo n a ll be ne fic ia rie s an d o th er p ers on s i nt eres te d i n t he tru st . Decla rat io n a rt. VI( b) (3 ). If an y di sp ut e ari se s co nc ern in g t he pro pe r in te rp ret at io n o f th e d ecl arat io n, art ic le XXVI pro vi de s tha t the di sp ut e “ sh al l b e subm it te d t o a rb itrat io n b efo re a pa ne l co ns is ti ng of t hr ee p ers on s o f th e Ortho do x J ewis h fa ith.” Suc h apa ne l i n Heb rew i s ca ll eda be th di n. Th is pa ne l i s d ire ct ed , inth e ev en t o f an y di sp ut e, to- 6 -

[* 6] “ en fo rce the pro vi si on s o f th is Decl arat io n * * * an d g iv e an y pa rty the rig ht s he is en ti tl edto un de r New York l aw.” Arti cl e XXVI st at es th atth e d ecl arat io n a s a who le sh al l b e co ns tru ed“ to effe ctua te th e in te ntof t he pa rti es * * * tha t the y ha ve pe rfo rm edall th e n eces sa ry requi rem en ts forth is Decl arat io n t o b e v al id un de r Je wis h l aw.” Arti cl e XXVI co nt ai ns aninterro rem pro vi si on de si gn edto di sc ou rag e be ne fic ia rie s fr om

ch al le ng in g d is cret io na ry act s o f th e trus te es . It p ro vi de s: Inth e ev en t a b en efi ci ary of th e Tru stsh al l d ire ct ly or in di rect ly ins ti tu te , con du ctor i n a ny m an ne r wha te ve r ta ke part i n o r ai d i n a ny pro ceed in g t o o pp os e th e d is tri bu ti on of t he Trus t Es ta te , or fi le s an y act io n i n aco urt o f la w, or ch al le ng es any di st rib ut io n s etforth inth is Trus t i n a ny cou rt, arb itrat io n p an el or a ny oth er m an ne r, th eninsu ch ev en t the pro vi si on he rei n m ad e fo r su chbe ne fic iary sh al l the reupo n be rev ok edan d s uc h b en efi ci ary sh al l b e ex cl ud edfro m an y pa rti ci pa ti on inth e Tru stEst at e * * * . On Oct ob er 9 , 20 07 , an a tt orne y act in g fo r th e trus t m ai le d t o e ach be ne fici ary, inhi s o r he r cap aci ty as su chan d a s the gu ard ian o f an y m in orch il dr en , a writ te n n ot ic e cap ti on ed“Not ic e o f Ri gh t o f W ithd rawal .” Eachlet te r in fo rm edit s res pe ct iv e rec ip ie ntth ata co nt rib ut io n h adbe enm ad e to th e trus t an d t ha t “ y ou an d e achof your ch il dr enun de r th e ag e o f 18 y ears as b en efi ci ari es of t he Trus t ha ve a ri gh t t o wi th dr aw pr op erty or f un ds up to $2 4,0 00 .00 each fro m th e Tru st .” Thi s l et te r advi se d t ha t wi th dr awal rig ht s h adto be ex erci se d wi th in 30 da y s fr om- 7 -

[* 7] it s re cei pt . The rec or d d oe s n otin di cat e whe th er an y be ne fic ia ry

ha s ev er ex erci se d wi th dr awal rig ht s, wh ethe r th e trus te es ha ve ev er m ad e d is cret io na ry di st rib ut io ns , or wh ethe r a d is pu te ha s ev er ar is enco nc ern in g e ithe r. Ther e is no ev id en ce o f an y

pre arra ng edpl anor u nd ers ta nd in g a m on g p et it io ne rs an d t he be ne fic ia rie s tha t wo ul d p rev en t the lat te r fro m ex erci si ng th ei r withd rawal rig ht s. Fed eral Tax M at te rs Neit he r pe ti ti on er t im el y

fil edFo rm

70 9, Un it edSta te s Gi ft ( an d Gen erati on -Sk ip pi ng Tran sf

er) Tax Return, fo r 20 07 . On Dece m be r 15 , 20 11 , aft er b ei ng co nt act edby the IRS, ea chpe ti ti on er s ub m it te d asep arat e Fo rm 70 9 re po rti ng gi fts to th e trus t dur in g 2 00 7 o f as se ts va lu edat $ 1,6 31 ,00 0. Th es e as se ts co nsi st edof p et it io ne rs ’ res id en ce i n B ro ok lyn, New York , two ot he r pr op ert ie s i n Bro ok lyn (h el d d ire ct ly or th ro ug h ali m it edli ab il ity co m pa ny), anda co nd om in iu m inFlo rid a. The re po rte d v al ue s, t ot al in g $ 3,2 62 ,00 0, wer e b as edon ap pr ai sa ls en cl os edwith t he returns or ( in th e cas e o f th ei r res id en ce) o n the m ark etva lu e refle ct ed“ on th e 2 00 7/ 08 New YorkCit y Real Pro pe rty Tax Ass es sm en t Ro ll s.” The Fo rm s 7 09 in cl ud edco ns en ts by each p et it io ne r th atth e g ift s wer e to be “ co nsi de redas m ad e o ne -h al f by eachof [ us ]. ” Pet it io ne rs cla im edan nu al ex cl us io ns of $7 20 ,00 0 o n the th eo ry

th atbo th ha d m ad e se pa rat e g ift s o f $1 2,0 00 to eachof- 8 -

[* 8] th e trus t’s 6 0 b en efi ci ari es . After app li cat io n o f un ifi edcred it s, the Fo rm s 70 9 re po rte d n o g ifttax du e. Fo ll owi ng ex am in at io n o f th es e returns , th e IRS sen t p et it io ne rs sep arat e no ti ces of d efi ci en cy

de te rm in in g t ha t the y

were i ne li gi bl e fo r th e cl ai m edannu al ex cl us io ns an d d et erm in in g a dd it io ns to tax forlat e fi li ng . Peti ti on ers ti m el y pe ti ti on edth is Co urt, an d t he ir c as es were co ns ol id at edfortri al or o th er d is po si ti on . The parti es ha ve fil edcro ss -m ot io ns forpa rti al su m m ary jud gm en t as ki ng th e Co urt t o d eci de whet he r pe ti ti on ers are el ig ib le to cla im an nu al ex cl us io ns un de r se ct io n 2 50 3( b) . Dis cu ss io n A. Su m

m ary Ju dg m en t St an da rd The pu rp os e o f su m

m ary jud gm en t i s t o e xp ed it e li ti ga ti on an d a vo idco st ly, ti m e-co ns um in g, an d u nn eces sa ry tri al s. Fl a. Peac h C or

p. v . Comm is si on er, 9 0 T.C. 67 8, 6 81 (19 88 ). Und er Ru le 12 1( b) th e Co urt m ay gra ntsu m

m ary jud gm en t whe n the re i s n o g enui ne di sp ut e as to any m at eri al factan d ade ci si on m ay be ren de redas am at te r of

law. Su nd st ran d C or

p. v . Comm is si on er, 9 8 T.C. 5 18 , 52 0 (1 99 2) , aff’d, 1 7 F .3d96 5 (7 th Cir . 19 94 ). The p art ie s ag ree o n a ll qu es ti on s o f m at eri al factan d h av e ex pr es se d t ha t co ns en su s b y fil in g c ro ss -m ot io ns forpa rti al- 9 -

[* 9] su m m ary jud gm en t. We fin d t ha t the qu es ti on pre se nt edis ap pr op ria te for su m m ary ad jud ic at io n. 2 B. Ann ua l Ex cl us io ns Fro m GiftTax Sect io n 2 50 1( a)(1 ) im

po se s a t ax “ on th e tr an sf er o f pr op erty

by gift ” dur in g an y cal en da r y ear. Se ct io n 2 51 1( a) p ro vi de s tha t “ th e ta x i m po se d b y sec ti on 25 01 sh al l ap pl y

whet he r th e tr an sf

er i s i n t ru stor o th erwi se .” The p art ie s ag ree t ha t pe ti ti on ers ’ gi fts to th e trus t i n 2 00 7 wer e co m pl et edgi fts withi n t he m ean in g o f th es e p ro vi si on s. Sect io n 2 50 3( b) (1 ) pr ov id es anex cl us io n fr om tax ab le gi fts . It p ro vi de s th at , “ [i]n t he cas e o f gi fts (ot he r th angi fts of f utur e in te res ts inpro pe rty) m ad e to an y pe rs on by the do no r du rin g t he cal en da r y ear, the fir st$1 0,0 00 of s uc h g ift s t o su chpe rs on sh al l n ot* * * b e in cl ud edinth e to ta l am ou ntof g ift s m ad e dur in g su chy ear.” Sect io n 2 50 3( b) (2 ) ad jus ts th is an nu al ex cl us io n fo r in fla ti on ; fo r gi fts Res po nd en t co nt en ds th atth ere m ay be fact s i n d is pu te co nc ern in g t he 2 nu m be r of annu al ex cl us io ns to whi chpe ti ti on ers wou ldbe en ti tl ed , ass ert in g t ha t th ey “ ha ve no t p ro vi de d a ny do cu m en ta ti on * * * t o e st ab li sh th e num be r of th e be ne fic ia rie s o f th e Tru stat t he ti m e th e g ift s wer e m ad e.” Pet it io ne rs ha ve suppl ie d u nc on te st edaffi da vi ts fro m Sal om on Mi ke l as tru st ee an d fr om th e trus t’s at to rn ey att es ti ng th atth e tr

us t h ad60 be ne fic ia rie s o n J un e 1 5, 2 00 7, t o e ach of who m no ti ce o f withd rawal rig ht s was gi ve n o n Oct ob er 1 7, 2 00 7. Inan y ev en t, th e ex actnu m

be r of be ne fic ia rie s i s n otm at eri al to th is op in io n. Re sp on de ntals o as se rts th atth ere m ay

be fact s i n d is pu te as t o “ th e v al ue of t he gi fts .” The IR S o n au di t d idno t que st io n t he va lu e o f th e g ift s; if the re i s a g enui ne di sp ut e as to va lu at io n, i t i s n otm at eri al to th is op in io n.- 10 -

[* 10 ] m ad e dur in g 2 00 7, the ex cl us io n was $1 2,0 00 pe r do ne e. Rev . Pro c. 20 06 - 53 , sec . 3.3 2, 2 00 6- 2 C .B. 99 6, 1 00 6. The an nu al ex cl us io n i s av ai labl e o nl y for gi fts of a“pr es en t i nt eres t i n p ro pe rty.” Sec. 25 03 (b )(1 ). A “pr es en t i nt eres t i n p ro pe rty” is de fin edas “ [a]n unr est ric te d ri gh t t o t he imm ed ia te us e, po ss es si on , or e njo ym en t o f pr op erty or t he in co m e fro m

pro pe rty.” Sec. 25 .25 03 -3 (b ), GiftTax R eg s. “ No p artof t he va lu e o f a g iftof afutur e in te res t m ay be ex cl ud ed ” fro m

tax ab le gi fts . Id. p ara. (a ). On i ts face th e d ecl arat io n g av e eac h t ru stbe ne fic ia ry anun res tri ct edrig ht to withd raw, dur in g 2 00 7, an am ou ntequa l t o “ [t]he m ax im um fed eral gi ft t ax ex cl us io n u nd er s ect io n 2 50 3( b) of t he Co de ineffe ctat t he ti m e o f [the ] tra ns fer.” Bec au se pe ti ti on ers ele ct edto sp li t the ir g ift s, ea chbe ne fic ia ry was thu s empoweredto withdraw $ 24 ,00 0. Each be ne fic ia ry rece iv ed(di rect ly or th ro ug h h is or he r pa ren t) t im el y

an d e ffec ti ve no ti ce o f th e ri gh t t o wi th dr aw th is su m . The d ecl arat io n s ta te s une qu iv oc al ly tha t, upo n re cei ptof ati m el y withd rawal de m an d,

“ th e Tru st ees sh al l i m

m ed ia te ly dis tri bu te to su chbe ne fic ia ry or g ua rd ian t he pro pe rti es all oc ab le to th em , free o f trus t.” Res po nd en t co nc ed es th atth e d ecl arat io n a ffo rd s ea chbe ne fic ia ry anun co nd it io na l ri gh t o f withd rawal an d s ug ge st s n o c ol or ab le ba si s o n wh ic h t he tru s-- 11 -

[* 11 ] te es co ul d p ro pe rly refu se to ho no r a t im el y withd rawal de m an d. 3 Res po nd en t n ev erthe le ss co nt en ds th atth e b en efi ci ari es di d n otrece iv e a “pr es en t in te res t i n p ro pe rty” bec au se th ei r ri gh ts of wi th dr awal were n ot“ le ga ll y en fo rceabl e” i n p ract ic al term s. Acco rd in g t o re sp on de nt , a rig htof wi th dr awal is

“ le ga ll y en fo rceabl e” o nl y

if the be ne fic ia ry

can“ go be fo re a s ta te co urt t o e nf or ce th atrig ht .” Thi s i s s om ethi ng th atres po nd en t b el ie ve s a b en efi ci ary of th e tr us t wou ldbe ve ry

rel uc ta ntto do . Res po nd en t s ta rts by hy

po th es iz in g t ha t the tru st ees m ig htrefu se , witho ut le ga l b as is , to ho no r a t im el y withd rawal de m an d. Inth atev en t, arti cl e XXVI of th e d ecl arat io n wo ul d re qu ire th e b en efi ci ary to subm itth e d is pu te to a be th di n. If the be th di n, ag ai n wi th ou t l eg al ba si s, s us ta in edth e trus te es ’ refu sa l t o h on or th e d em an d, re sp on de ntag rees th atth e b en efi ci ary co ul d s eekredres s i n aNew York c ou rt d es pi te th e St at e’s ge ne ral rel uc ta nc e to di sturb arb itral Arti cl e VI(b )(3 ) of

th e d ecl arat io n s ta te s tha t the tru st ees m ay “ withh ol d 3 pr in ci pa l an d/ orin co m e fro m an y be ne fic ia ry .” Thi s i s an ad jun ctof t he tru st ees ’ “ ab so lu te an d u nr ev ie wab le di sc ret io n” to m ak e d is cret io na ry di st rib ut io ns un de r art ic le VI; i t d oe s n otli m itor qua li fy th e b en efi ci ari es ’ un co nd it io na l ri gh t t o withd raw p ro pe rty un de r art ic le V. Artic le V(g) pro vi de s tha t the tru st ees m ay ex cl ud e b en efi ci ari es fro m ha vi ng withd rawal rig ht s “ with re sp ectto any ad di ti on to th e Tru st .” Thi s re fers to “ ad di ti on al pro pe rty” tran sf erre d t o t he tru stiny ears aft er i t i s es tabl is he d. Se e Decl arat io n a rt. V(a ). Res po nd en t ag rees th atth is cl au se co ve rs “ ad di ti on al co nt rib ut io ns ” an d d idno t em po wer the tru st ees to refu se a ti m el y

withd rawal de m an d wi th res pe ctto pro pe rty ini ti al ly con tri bu te d t o th e trus t dur in g 2 00 7.- 12 -

[* 12 ] de ci si on s. Buta be ne fic ia ry wou ldbe ex tre m el y

rel uc ta ntto go to co urt, 4 res po nd en t i ns is ts , bec au se he wou ldth ereupo n fo rfei t al l h is rig ht s u nd er the tru st by virtu e o f art ic le XXVI’ s i n t erro rem claus e. Prac ti cal ly spe ak in g, the refo re, res po nd en t co nt en ds th atth e b en efi ci ari es ’ withdrawal rig ht s ar e “ il lu so ry ” an d d o no t co ns ti tu te a “pr es en t i nt eres t i n p ro pe rty.” A li tt le ba ck gr ou ndm ay

he lp inev al ua ti ng res po nd en t’s ch ai n o f rea so ni ng . The tru stat i ss ue he re i s a “ de m an d t ru st ,” of te n c al le d a“ Crum

m ey tru st ” b ecau se of th e fav or ab le tre atm en t ac co rd edsu cha trus t b y th e Co urt o f App eal s fo r th e Nin thCir cu itinCru m

m ey v. Co m m is si on er, 3 97 F.2d82 (9th C ir. 1 96 8) , rev ’g in pa rt T.C. M em o. 1 96 6- 14 4. Th e co urt the re “ ap pr ov edanin ge ni ou s d ev ic e to ob ta in an[an nu al gi ft t ax ] ex cl us io n fo r a d is cret io na ry accu m ul at io n tru stby giv in g b en efi ci ari es th e ri gh t t o d em an d i m m ed ia te di strib ut io n o f pa rti cu la r am ou nt s.” B or is I. Bit tk er & Lawre nc e Lokke n, Fe de ral Taxa ti on of I nc om e, Est at es , andGift s, p ara. 1 24 .3.3 , at 1 24 -1 3 (2 d e d. 1 99 3) . The de m an d c laus e in Cru m m ey , subs ta nt ia ll y

si m il ar t o t ha t h ere, p ro vi de d th atwhen ev er anad di ti on was m ad e to th e tr us t, a b en efi ci ary orgu ard ia n a ct in g Acco rd in g t o re sp on de nt , ben efi ci ari es of atru stwil l n otbe de em edby a 4 New Yorkco urt t o h av e co ns en te d t o a n a rb itrat io n p ro vi si on , anda New York co urt wi ll no t en fo rce a n a rb itral awardag ai ns t a n on co ns en ti ng pa rty. G iv en res po nd en t’s co nc es si on on th is po in t, we n eedno t ad dr es s the co rrec tn es s o f th es e St at e la w pro po si ti on s.- 13 -

[* 13 ] fo r a m in orbe ne fic ia ry co ul d d em an d i m

m ed ia te withd rawal of a n a m ou nt ke y edto th e m ax im

um an nu al ex cl us io n u nd er s ect io n 2 50 3( b) . The co urt h el d th is de m an d ri gh t t o b e a “pr es en t i nt eres t i n p ro pe rty” eve n t ho ug h n o g ua rd ia n fo r th e m in orbe ne fic ia rie s h adbe enap po in te d. Un de r th e te stitad op te d, “ al l tha t is ne ces sa ry

is to fin d tha t the de m an d c ou ldno t b e res is te d,” whi chth e co urt un de rs to odto m ean“ le ga ll y res is te d.” Cru m

m ey v. Co m m is si on er, 3 97 F.2dat 88 . Thatbe in g s o, the co urt co nc lu de d t ha t the tru st ee wo ul d h av e n o c ho ic e “bu t to ha ve a gu ard ia n app oi nt edto tak e th e p ro pe rty dem an de d” onth e m in or ’s be ha lf. Ib id . The co urt re jecte d t he IRS’ subm is si on th at“ a la wsu itor t he ap po in tm en t o f anag en t i s a n eces sa ry pre lu de to th e m ak in g o f a d em an d upo n th e trus te e.” Id . at 8 7. “ The on ly tim e whe n the [m in or ’s] di sabi li ty to s ue wou ld co m e in to pl ay ,” th e co urt n ot ed , “ wou ldbe if the tru st ee d is reg ard edth e d em an d an d c omm it te d abre ach of tru st . Thatwou ldno t, h owe ve r, vi ti at e th e d em an d.” Ib id . In19 73 th e IRS ex pr es se d i ts ge ne ral ag reem en t wi th th e Cru m m ey li ne of an al y si s. See Rev . Rul . 73 -4 05 , 19 73 -2 C.B. 3 21 , rev ok in g R ev . Rul . 54 -9 1, 19 54 -1 C.B. 2 07 . The IR S th ere c on cl ud edth at“ if t he re i s n o i m pe di m en t u nd er th e trus t o r lo cal law t o t he ap po in tm en t o f a g ua rd ia n a ndth e m in ordo ne e h as a rig htto de m an d d is tri bu ti on , th e tr an sf er i s a g iftof apre se ntin te res t tha t qua li fie s- 14 -

[* 14 ] fo r th e an nu al ex cl us io n.” Ibi d. Th e IRS co nf irmed th is co nc lu si on inRev . Ru l. 8 5- 24 , 19 85 -1 C.B. 3 29 , 33 0, s ta ti ng : “ Whe n atru stin st ru m en t g iv es a be ne fic ia ry th e p owe r to de m an d i m m ed ia te po ss es si on [an d e njo ym en t] of co rp us [or in co m e], the be ne fic iary

ha s re cei ve d apre se ntin te res t.” Acc or d R ev . Rul . 81 -7 , 19 81 -1 C.B. 4 74 . W e ad op te d t he Co urt o f App eal s fo r th e Nin th Cir cu it ’s reas on in g a nd res ul t i n Es ta te of C ris to fan i v . Comm is si on er, 9 7 T.C. 7 4 (1 99 1) , a un an im ou s rev ie wedOpi ni onof t hi s C ou rt. Th e p ro pe r fo cu s o f an al y si s, we ex pl ai ne d, i s n ot

“ th e li ke li ho odth atth e m in orbe ne fic ia rie s wo ul d a ctua ll y rece iv e p res en t en

joy m en t o f th e p ro pe rty,” bu t “ th e le ga l ri gh t o f th e m in or be ne fic ia rie s t o d em an d pa ym en t fr om

th e trus te e.” Id . at 8 0. We th eref or e ex am in ed“ th e ab il ity of t he be ne fic ia rie s, i n aleg al sen se , to ex erci se th ei r ri gh t t o wi th dr aw trus t co rp us , and th e trus te e’s ri gh t t o l eg al ly resi sta be ne fic ia ry ’s dem an d fo r pa ym en t.” Id . at 8 3. Co ns id eri ng th e te rm s o f th e trus t ag reem en t, we co nc lu de d t ha t “ each gra nd ch il d po ss es se d t he leg al rig htto withd raw tru stco rp us an d tha t the tru st ees wou ldbe un ab le to leg al ly resi sta gr an dc hi ld ’s withdrawal de m an d.” Ibi d. We acco rd in gl y he ldth atth e m in orbe ne fic ia rie s’ withd rawal rig ht s co ns ti tu te d “ a p res en t i nt eres t fo r pu rp os es of s ect io n 2 50 3( b) .” Id . at 8 4.- 15 -

[* 15 ] In19 92 th e IRS publ is he d a n a ct io n o n d eci si on(AOD) acqui es ci ng inth e res ul t o f Est at e o f Cri st of an i. AOD 19 92 -9 (Apr . 6, 1 99 2) , 19 92 W L 79 48 26 . In 19 96 itpubl is he d asec on d AOD ex pl ai ni ng it s p os it io n. AOD 19 96 -1 0 (J ul y 15 , 19 96 ), 19 96 W L 39 00 89 . It the re s ta te d tha t the IRS “ do es no t co nt es t an nu al gi ft ta x e xc lu si on s fo r Cru m

m ey po wers wher e th e trus t i ns tru m en t g iv es th e p owe r ho ld ers a bo nafid e unr es tri ct edleg al rig htto de m an d i m m ed ia te po ss es si on an d en joym en t o f trus t i nc om e o r co rp us .” Id ., 19 96 W L 39 00 89 , at * 1. Ho wev er, i t st at edth atth e IRS “wil l d eny th e ex cl us io ns forCru m

m ey po wers * * * wh ere t he withd rawal rig ht s ar e n otinsubs ta nc e wha t the y pu rp ort t o b e in form .” Ib id . Ann ua l ex cl us io ns wou ldbe ch al le ng ed , th e IRS st at ed , if “ th ere was a pr earran ge d u nd ers ta nd in g t ha t the withd rawal rig htwou ldno t b e ex erci se d” or t ha t

“ do in g s o wo ul d re su ltinadve rs e co ns eque nc es to it s h ol de r (e.g ., lo si ng othe r rig ht s o r gi fts un de r th e in st an t tru stin st ru m en t o r ot he r be ne fic ia l arran ge m en t).” Ib id . In s uc h c irc um st an ces , th e IRS wou ldco nt en d tha t “ th e cre at io n o f th e withd rawal rig htis no t a b on a fi de gi ft o f a p res en t i nt eres t i n p ro pe rty.” Ibi d. 5 As the Co urt o f App eal s fo r th e Nin th Cir cu itno te d i n C ru m m ey , 39 7 F .2d 5 at87 , andas we no te d i n Es ta te of C ris to fan i, 9 7 T.C. at80 -8 1, the Co urt o f Appe al s fo r th e Sec on d C irc ui t i n 1 95 2 a rti cu la te d aso m ewh atdi ffer en t ap pr oa chfor de te rm in in g wh ethe r a wit hd rawal rig htco ns ti tu te s a “ pr es en t i nt eres t.” Se e St ife l v. Co m m is si on er, 1 97 F.2d10 7 (2 d C ir. 1 95 2) (ho ld in g t ha t a c ou rt s ho ul d d et erm in e whe th er a m in orbe ne fic ia ry is li ke ly to re cei ve pre se nten joym en t o f tr

us t (co nt in ue d...)- 16 -

[* 16 ] Res po nd en t d oe s n otdi sp ut e th atall tru stbe ne fic ia rie s (i nc lu di ng m in or be ne fic ia rie s) ha d dur in g 2 00 7, an d re cei ve d t im el y no ti ce o f, anun co nd it io na l rig htto withd raw p ro pe rty from th e tr us t. As i n Es ta te of C ris to fan i, 9 7 T.C. at83 , an d i n C ru m

m ey , 39 7 F .2dat 8 8, the re i s n o s ug ge st io n t ha t the tru st ees he re co ul d

“ le ga ll y res is t a * * * [be ne fic ia ry ’s] withd rawal de m an d.” Nor d oe s re sp on de nt co nt en d t ha t the re ex is te d a ny “pr earr an ge d u nd ers ta nd in g” th atwithd rawal rig ht s wou ldno t b e ex erci se d. Se e Est at e o f Koh ls aatv. Co m m is si on er, T.C. Mem o. 19 97 -2 12 , 73 T.C.M. (CCH) 2 73 2, 2 73 4 (f in di ng no su ch“un de rs ta nd in g” inth at cas e). Rat he r, res po nd en t co nt en ds th atth e wit hd rawal rig htwas “ il lu so ry ”

(...co nt inue d) 5 pr op erty by exam in in g t he tru stin st ru m en t, the Sta te law as to m in or s, an d t he fin an ci al an d o th er ci rcu m st an ces of t he pa rti es ), aff’g 1 7 T.C. 6 47 (19 51 ). Thi s Co urt “ fo ll ow[ s] a Co urt o f App eal s d eci si on whi chis squa rel y inpo in t wh ere ap pe al fro m

ou r de ci si on li es to th atCo urt o f App eal s an d t o t ha t co urt al on e.” Gol se n v . Comm is si on er, 5 4 T.C. 7 42 , 75 7 (1 97 0) , aff’d, 4 45 F.2d98 5 (1 0t h C ir. 19 71 ). Pet it io ne rs li ve d i n New Yo rkwhen th ey fil edth ei r pe ti ti on s, an d abs en t st ip ul at io n t o t he co nt rary, an ap pe al wou ldli e to th e Co urt o f App eal s fo r th e Seco ndCir cu it . See s ec. 7 48 2( b) (1 )(A). The IRS d idno t ci te Sti fel inEst at e o f Cri st of an i, 9 7 T.C. at81 , anditdi d n otcit e St ife l i n b rie fin g t he in st an t ca se . Our res earc h i nd ic at es th atno co urt h as cit edSti fel si nc e we d eci de d Es ta te of Cri st of an i i n 1 99 1. Be cau se th e IRS ha s i ss ue d s ev eral rev enue rul in gs acce pt in g th e Cru m m ey ap pr oa ch , andbe cau se res po nd en t h as no t ci te d S ti fel he re, we d eem res po nd en t t o h av e co nc ed edth athe wou ldno t ad op t the ap pr oa chof t he Co urt o f App eal s i n S ti fel or tha t, i f he di d a do ptit , itwou ldno t l eadto a res ul t d iff eren t fro m th e ap pr oa chou tl in edinth e te xt .- 17 -

[* 17 ] be cau se an y

att em ptto see k l eg al en fo rcem en t o f th atrig ht“ wou ldres ul t i n adve rs e co ns eque nc es to it s h ol de r.” AOD 19 96 -1 0, 1 99 6 WL 39 00 89 , at * 1. W e d is cern two fla ws i n re sp on de nt ’s arg um en t. Fi rs t, i f we ad op t h is pre m is e th ata withd rawal rig htm us t n oton ly be “ le ga ll y

irr es is ti bl e” und er the tru st in st ru m en t, b utals o b e “ le ga ll y en fo rceabl e” i n a n e xtrin si c se ns e, itis no t o bv io us why the be ne fic ia ry

m us t b e ab le to “ go be fo re a s ta te co urt t o e nf or ce tha t ri gh t.” Here, i f th e trus te es were t o b reac h t he ir f iduc ia ry du ti es by refus in g ati m el y withdr awal de m an d, the be ne fic ia ry co ul d s eekjus ti ce fr om

a be th di n, wh ic h i s d irect edto “ en fo rce t he pro vi si on s o f th is Decl arat io n * * * an d g iv e an y party the rig ht s h e is en ti tl edto un de r New York l aw.” A be ne fic ia ry wou ldsu fferno ad ve rs e co ns eque nc es fro m subm it ti ng hi s cl ai m

to a be th di n, an d re sp on de ntha s no t ex pl ai ne d wh y

th is is no t en fo rcem en t en ou gh . Seco nd , if we as su m e arg ue nd o t ha t o urhypo th et ic al ly-frus tra te d b en efi ci ary m us t h av e anen fo rcem en t re m edy inSta te co urt, re sp on de ntco nc ed es th at th e b en efi ci ari es of t he tru stha ve su cha rem edy . Res po nd en t’s ar gu m en t i s n ot th atjud ic ia l en fo rcem en t i s u na va il ab le , bu t tha t thi s re m edy is “ il lu so ry ” b ecau se th e in terro rem

pro vi si onwou ldde te r be ne fic ia rie s fr om pu rs ui ng it . W e th in k re sp on de ntha s m is ap pr eh en de d thi s p ro vi si on ’s m ean in g.- 18 -

[* 18 ] Arti cl e XXVI of

th e d ecl arat io n p ro vi de s tha t a b en efi ci ary sh al l fo rfei t h is rig ht s und er the tru stif h e “ di rect ly or in di rect ly ins ti tu te [s ] * * * an y pro ceed in g to op po se th e d is tri bu ti on of t he Trus t Es ta te , or fi le s an y act io n i n aco urt o f la w, orch al le ng es an y

di st rib ut io n s etforth inth is Trus t i n a ny court, arb itrat io n p an el oran y ot he r m an ne r.” Whi le no t a p arag on of draft sm an sh ip , th is pro vi si on is ev ide nt ly des ig ne d t o d is co ur ag e le ga l ch al le ng es to de ci si on s b y th e trus te es to m ak e di sc ret io na ry

di strib ut io ns of t ru stpro pe rty, e.g., to he lp be ne fic ia ry A fin is h c ol le ge , hel p b en efi ci ary B en te r a b us in es s, o r en ab le be ne fic ia ry C to ha ve a ni ce wed di ng . Arti cl e VI(b )(3 ) gi ve s the tru st ees “ ab so lu te an d u nr ev ie wab le di sc reti on ” in su chm at te rs an d s ta te s tha t the ir ju dg m en t “ as to th e am ou nt s o f su ch pa ym en ts an d t he advi sabi li ty the reo f sh al l b e fi na l an d c on cl us iv e.” The ev id en t p ur

po se of t he interro rem

pro vi si on is to ba ck st op art ic le VI by di sc ou rag in g l eg al act io ns see ki ng to ch al le ng e th e tr us te es ’ “ ab so lu te an d u nrev ie wab le di sc ret io n” co nc ern in g d is cret io na ry di st rib ut io ns fro m

th e trus t. The fir stan d t hi rdclaus es of t he interro rem pro vi si on ex pl ic it ly trackth is pu rp os e, pr ov id in g t ha t a b en efi ci ary wil l fo rfei t h is rig ht s i f he in st itut es a pr oc eed in g “ to op po se th e d is tri bu ti on of t he Trus t Es ta te ” o r “ ch al le ng es any di st rib ut io n * * * in an y co urt.” A b en efi ci ary who fil edsu itto co m pe l the tru st ees to ho no r a t im el y withd rawal de m an d wo ul d n otbe “ op po si ng or c ha ll en gi ng ” an y di st rib ut io n- 19 -

[* 19 ] (d is cret io na ry

or o th erwi se ) fro m

th e trus t. Bec au se th e b en efi ci ary’ s ac ti on wou ldno t b e co ve redby the interro rem pro vi si on , th atpro vi si on lo gi cal ly w ou ld no t d is su ad e h im

fro m see ki ng jud ic ia l en fo rcem en t o f hi s ri gh ts . Inurg in g abro ad er co ns tru ct io n o f th e interro rem pro vi si on , res po nd en t fo cu se s o n i ts sec on d c laus e, “ orfil es an y act io n i n aco urt o f la w.” Butth is claus e can no t b e rea d l it eral ly; othe rwis e, itwou ldba r be ne fic ia rie s fr om pa rti ci pa ti ng in th e trus t i f th ey

fil edsu itto reco ve r fo r m is ch ie vo us be ha vi orby the ir n ei gh bo r’s do g. Th e se co ndclaus e m us t b e g iv ena li m it in g c on st ru ct io n. W e th in k t he m os t 6 se ns ib le li m it in g c on st ru ct io n i s t o i nt erp retth is claus e in pa ri m at eri a wit h t he two claus es th atsurro un d i t. The sec on d c laus e th us ba rs a be ne fic ia ry fro m en joy in g b en efi ts un de r th e tr us t i f he fil es su itinany

co urt t o o pp os e o r ch al le ng e a de ci si on by the tru st ees to di st rib ut e trus t p ro pe rty to a no th er b en efi ci ary. Thi s in te rp ret at io n g iv es th e interro rem pro vi si on a co he ren t m ean in g t ha t i s co ns is te nt with t he pro vi si on s o f art ic le VI affo rd in g t he tru st ees “ ab so lu te an d u nr ev ie wab le di sc ret io n” co nc ern in g s uc h m at te rs . 7 See I n re Est at e o f W al sh (Tip pi ng ), 97 5 N.Y.S.2 d 3 70 , 20 13 W L 33 88 64 4, 6 at*2 (N.Y. Sur. 2 01 3) (“ Whi le interro rem claus es are en fo rceabl e, th ey are n ot fav or edan d m

us t b e st ric tl y

co ns tru ed .” (quo ti ng Mat te r of Sin ge r, 13 N.Y.3d44 7, 45 1 (2 00 9) )). The can on of c on st ru ct io n “ no sc itura so ci is ”--aLati n p hr as e m ean in g “ itis 7 (co nt in ue d...)- 20 -

[* 20 ] Insu m , we con cl ud e th atth e b en efi ci ari es of t he tru stpo ss es se d a“pr es en t in te res t i n p ro pe rty” bec au se th ey ha d, dur in g 2 00 7, an un co nd it io na l ri gh t t o withd raw p ro pe rty from

th e trus t an d t he ir wi th dr awal de m an ds co ul d n otbe

“ le ga ll y res is te d” by the tru st ees . Cru m m ey , 39 7 F .2dat 8 8; Est at e o f Cri st of an i, 97 T.C. at 8 4. As su m in g a rg ue nd o t ha t the be ne fic ia rie s’ withd rawal rig ht s m us t be en fo rceabl e in Sta te co urt, we co nc lu de th atth is rem edy , whi ch (...co nt inue d) 7 kn own by its ass oc ia te s” --s up po rts th e co ns tru ct io n s etforth inth e te xt . This can on of c on st ru ct io n “ ho ld [s ] th atth e m ean in g o f anun cl ear wo rdor p hr as e sh ou ld be de te rm in edby the word s i m m ed ia te ly surro un di ng it .” Bla ck ’s Law Dict io na ry 11 60 -1 16 1 (9 th ed . 20 09 ). Whi le th is can on do es no t s etforth anin es cap ab le rul e, itis oft enwis el y

ap pl ie d t o a vo idgi vi ng un in te nd edbre adth to a te rm s tha t ar e su sc ep ti bl e to m

ul ti pl e m ean in gs . See J am es v. Un it edSta te s, 5 50 U.S. 19 2, 2 22 (2 00 7) (A wordsh ou ldbe in te rp ret ed“ in a m anne r th atm ak es it‘ fit ’ with t he wor ds with wh ic h i t i s cl os el y ass oc ia te d.” ); Wall ace v . Commis si on er, 1 28 T.C. 13 2, 1 41 (20 07 ) (“ [T]he m ean in g o f anun cl ear wo rdor p hr as e sh ou ldbe de te rm in edby the word s i m

m ed ia te ly surro un di ng it .”). Fo r ex am pl e, in Jar eck i v . G.D. Searl e & Co ., 36 7 U.S. 3 03 , 30 7 (1 96 1) , th e Supr em e Co urt i nt erp ret edth e wor d “ di sc ov ery” as u se d i n s ect io n 4 56 (a)( 2) (B) o f th e In te rn al Rev enue Co de of 19 39 , whi chim

po se d t ax on “ in co m e res ul ti ng fro m ex pl or at io n, d is co ve ry , or pr os pe ct in g.” Whe reas “ di sc ov ery” is a b ro adterm th atinot he r co nt ex ts can in cl ud e g eo gr ap hi cal an d s ci en ti fic di sc ov eri es , th e Co urt h el d t ha t i ts ass oc ia ti on with “ ex pl or at io n” an d “ pr os pe ct in g” su gg es te d t ha t the term , as u se d i n t hi s st atut e, ha d t he na rro wer m ean in g o f “ di sc ov ery of m in eral res ou rces .” Id . at 3 07 . Here, the claus e “ fil es any act io n i n aco urt o f la w” is su sc ep ti bl e to a br oa d ra ng e of m ean in gs . App lying th e “ no sc itura so ci is ” can on , we cansu rm is e th atth e dr aft ers of t he de cl arat io n i nt en de d t o g iv e itsco pe co m pa rab le to th atof t he cl au se s s urro un di ng it . Alth ou gh th is in te rp ret at io n re nd ers th e se co ndclaus e su rp lu sa ge to so m e d eg ree, the re i s a g reatde al of s ur pl us ag e in art ic le XXVI an yway , andwe do no t re gardth is as astro ng co un te rwei gh t h ere.- 21 -

[* 21 ] res po nd en t co nc ed es was l it eral ly avai labl e, was als o p ract ic al ly avai labl e be cau se th e in terro rem

pro vi si on , pro pe rly con st ru ed , wou ldno t d et er be ne fic ia rie s fr om

pu rs ui ng jud ic ia l re li ef. W e wil l ac co rd in gl y gra ntpe ti ti on ers ’ m ot io n fo r su m

m ary jud gm en t t o t he ex te ntco ns is te ntwith t hi s o pi ni on an d d en y res po nd en t’s m ot io n fo r pa rti al su m m ary jud gm en t. An ap pr op ria te ord er wi ll be is su ed .