Court Opinion

ID: 4482749
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:15:40.461894+00
Date Added: 2024-06-11T15:03:39.826708
License: Public Domain

Raum, J., dissenting: I cannot agree with the majority opinion. It represents an impermissible extension of Arlean I. Herr, 35 T.C. 732, affirmed 303 F. 2d 780 (C.A. 3), which itself was an extreme case. The result herein stretches the statute beyond the breaking point. First. — It is important at the outset to keep the applicable provisions of the 1954 Code clearly in mind.1 The operative provision of the Code which allows the annual exclusion of the first $3,000 of gift to each person is contained in section 2503(b). However, this exclusion by its own terms, is not available in the case of “gifts of future interests in property.” And there is no dispute here that, by reason of the trustees’ discretion to accumulate income during the donee’s minority, the gift in this case is one of a future interest which, under section 2503(b) standing alone, would not qualify for any exclusion. Herr so held (35 T.C. at 734-735), relying upon Commissioner v. Disston, 325 U.S. 442, 448-449, and Hessenbrnch v. Commissioner, 178 F. 2d 785 (C.A. 3), and I understand that the majority herein agrees. Second. — It is only by reason of the special provisions of section 2503(c) that the donor may be entitled to the otherwise inapplicable $3,000 exclusion of (b). Subsection (c), which first appeared in the law in 1954, was enacted in response to the difficulties generated in attempting to classify a gift to a minor as a present interest. H. Rept. No. 1337, 83d Cong., 2d Sess., p. 93; S. Rept. No. 1662, 83d Cong., 2d Sess., p. 127. But it was made perfectly clear at the time that the new provision did not constitute a complete revamping of the law in respect of the exclusion for gifts to minors; rather, the House committee pointedly stated that the new provision of (c) merely “partially relaxes the ‘future interest’ restriction contained in subsection (b), in the case of gifts to minors, by providing a specific type of gift for which the exclusion will be allowed.” H. Rept. No. 1337, 83d Cong., 2d Sess., p. A322. Third — The limited relaxation in subsection (c), referred to by the House committee, saves a gift of a future interest to a minor from being disqualified under (b) if the “property and the income therefrom” may be expended by or on behalf of the minor prior to his attaining the age of 21 years and to the extent not so expended will pass to him when he becomes 21 (or to his estate or appointee if he dies prior thereto). In Herr, the total inconae interest was to last until the donee reached the age of 30, but, as in the present case, any income accumulated during minority was required to be paid to him at 21 (or to his estate or appointee if he should die prior thereto). The value of that minority income interest was in excess of $3,000, and the donor claimed the $3,000 exclusion in respect thereof. Although the accumulated income was payable to the donee at 21, the Government contended that since the corpus was not available to him until age 30, the “property” was not payable to the donee by the time he reached the age of 21 as required by the statute. Therefore the gift failed to comply with the specific condition of (c) that would make applicable the otherwise unavailable $3,000 exclusion of (b). The Government’s position was far from frivolous, and we were able to decide in favor of the donor only by dividing the gift into three separate parts: (1) The minority income interest, (2) the majority income interest, and (3) the corpus. By treating the minority income interest as a separate gift, we were able to construe the word “property” to mean “not the corpus of a trust, but rather the totality of elements that go to make up the entire gift that is being considered for classification as a present interest.” 35 T.C. at 736. In short, by isolating the gift of the minority income interest and considering it separately, we were able to treat that interest as the relevant “property”; and since that property was to be paid over to the donee in its entirety by the time he became 21, the “property” requirement of (c) was satisfied. Fourth — The instant case presents the identical problem, and, upon segregating the minority income interest from the majority income interest and corpus, the donor becomes entitled to and in fact has been given the benefit of an exclusion in respect of that minority income interest. The difficulty, however, is that the value of such minority interest in this case is less than $3,000, and the exclusion allowed to the donor was (as required by (b)) limited to the amount of that value. The donor nevertheless claims the exclusion of the full $3,000 — a result that can be justified only by blending the minority income interest and majority income interest into a single gift, which in this case would have a value in excess of $3,000. However, the minority and majority income interests, viewed as a single gift, do not satisfy the requirement of either (b) or (c). There is no question that such a gift is one of a future interest which, under (b) standing alone, would not qualify for an exclusion. Nor would it comply with conditions of (c). For, if the gift which is to be valued consists of two income interests (minority and majority), the “property” referred to in (c) would consist of both those components, and the requirement of (c) that such “property * * * may be expended by, or for the benefit of, the donee before his attaining the age of 21 years” could not be met. In my judgment, by treating the minority and majority income interests merely as components of a single gift, the prevailing opinion herein fails to appreciate the very theory upon which Herr rests. It is a theory that calls for the segregation of the minority income interest as a separate item of property, to be treated as a separate gift.2 Only when that is done is there any basis for the exclusion that was given to the taxpayer in Herr. And if that is done, the other elements of the transaction — i.e., the majority income interest and the corpus — are plainly future interests, neither within the scope of (b) nor within the provisions of (c) that might bring them into the otherwise inapplicable provisions of (b). This was the essence of our opinion in Herr, and the theory was approved on appeal by the Third Circuit (303 F. 2d at 781-782): The Tax Court held * * * that those parts of the gifts which were of income during minority were present interests entitling the taxpayers to the claimed deductions. * * * [[Image here]] If this is right, does it change the situation, if instead of the corpus going to X when M is twenty-one, it is to go to M when he is thirty? That is this case. We think the Tax Court was right in looking at this problem in the light of division of interest in the thing (corpus) in the way it did. The right to income during minority is a present interest; the right to income and principal after minority are future interests. [Emphasis supplied.] The donor cannot have it both ways. Either the gift of the minority income interest is a separate item of “property” to which the benefits of (c) inure, as in Herr, or the gift is of the entire income interest (minority and majority) in which event the language of (c) cannot apply. To summarize, and perhaps to belabor the point: (1) The property that is the subject of the gift for which the donor seeks the full $3,000 exclusion is the sum of the two income interests (minority and majority); (2) such exclusion is available only under section 2503(b), which is concededly inapplicable here, without first going through the door of section 2503(c); (3) in order to go through the door of (c) to get to (b), it is an indispensable requirement of (c) that the property be payable to the donee (or his estate, etc.) prior to his attaining his majority; (4) in order to satisfy this requirement the Herr case held that the minority income interest constitutes a severable and separate gift, the entire amount of which (property and income) is payable to the donee prior to majority, thus entitling the donor to the $3,000 exclusion to the extent of the value of that minority interest; (5) but in so holding, the necessary consequence of Herr is that the majority income interest is also a separate gift, which is plainly a future interest, if considered by itself, and if considered together with the minority income interest as a single gift, the “property” relating to that entire gift would not similarly be payable to the donee prior to attaining the age of 21; (6) as a consequence, if the two income interests were treated as a single gift, the “property” requirement of (c) would not be met, and the gift could not pass through the door of (c) in order to reach the desired goal of the exclusion of (b). Dawson, Sterrett, and Hall, JJ., agree with this dissent.   SEC. 2503. TAXABLE GIFTS. (b) Exclusions From Gifts. — In the case of gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year 1955 and subsequent calendar years, the first $3,000 of such gifts to such person shall not, for purposes of subsection (a), be included in the total amount of gifts made during such year. * * * (c) Transfer for the Benefit of Minor. — No part of a gift to an individual who has not attained the age of 21 years on the date of such transfer shall be considered a gift of a future interest in property for purposes of subsection (b) if the property and the income therefrom— (1) may be expended by, or for the benefit of, the donee before his attaining the age of 21 years, and (2) will to the extent not so expended— (A) pass to the donee on his attaining the age of 21 years, and (B) in the event the donee dies before attaining the age of 21 years, be payable to the estate of the donee or as he may appoint under a general power of appointment as defined in section 2514(c).    Herr has been followed in Rollman v. United States, 342 F. 2d 62 (Ct. Cl.), and was referred to with approval in Commissioner v. Thebaut, 361 F. 2d 428, 429 (C.A. 5), affirming 23 T.C.M. 603. See also Carl E. Weller, 38 T.C. 790, 809.