Before EVANS, MAJOR, and KERNER, Circuit Judges.
Involved herein is a demanded repayment of a refund of taxes for the year 1937, the recovery of which defendant successfully opposed in the District Court. The bases of the controversy were three gifts made by the taxpayer to his three daughters in 1937. A $5,000 annual statutory deduction was claimed by him and was first allowed but later denied by appellant who now seeks an adjudication of the validity of this claim of erroneous refunds.
Specifically, the legal question arises out of the application of the exception to the exemption permitted, in 1937, in the Federal Gift Tax Statute. 26 U.S.C.A. Int. Rev. Code, § 1003(b) (1). The exception to the $5,000 exemption arose in case the gift in trust be a "future interest."
The court held that the trusts created "present" interests and therefore taxpayer was entitled to his exemptions and judgment was entered accordingly.
The three irrevocable trusts were created by taxpayer in 1937 for his three daughters, all of whom were past eighteen years of age. Each trust was to terminate when the daughter reached thirty-five, at which time the corpus and accumulated income of the trust for her, if any, were to be paid to said child. If a daughter should die, leaving no children, the other daughters were to be alternate beneficiaries.
The trustee (who in the first instance was the settlor, and then, successively, his wife, and a corporate trustee) was to have absolute discretion*fn1 as to the distribution of the income or corpus. This power is thus defined by the trust instrument:
"The trustee shall hold, manage and preserve said trust estate for my daughter * * * and may from time to time in his sole discretion distribute or advance the net income, or such part thereof as he shall choose, to or for the use of my said daughter, and/or he may from time to time make advancements out of the principal or corpus of the trust to or for the use of my said daughter, and/or he may invest income and add the same to the corpus of said trust in his sole discretion."
In the light of the case of Fondren v. Commissioner, 324 U.S. -, 65 S. Ct. 499, 501, after the decision in the court below, in this case, we are quite free from any doubt as to the nature of the interests created.
They were future interests and the donor was therefore entitled to no exemption in the taxation of such gifts.
In the Fondren case, the settlor contemplated, and the facts of the case supported his intent, that no income would be paid to the minor beneficiaries. Rather, the income was to be accumulated until stated ages (25, 30, and 35) at which time a third of the corpus and accumulated income were to be paid the beneficiary. But there was provision for the use of the funds in case of necessity for care and education of the child.
It is the following language of the Court which controls our case.
"The sole issue is whether the gifts were of 'future interests' within the meaning of the statute and the regulation. The latter provides:
"Art. 11. '* * * Future interests is a legal term, and includes reversions, remainders, and other interests or estates, whether vested or contingent, and whether or not supported by a particular interest or estate, which are limited to commence in use, possession, or enjoyment at some future date or time. * * *' (Emphasis added.) Upon the facts the issue turns on whether the interests acquired by the minor beneficiaries were 'limited to commence in use, possession, or enjoyment at some future date or time.' ...