T.C. Memo. 1997-212
UNITED STATES TAX COURT
ESTATE OF LIESELOTTE KOHLSAAT, DECEASED,
PETER KOHLSAAT, COEXECUTOR, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 22465-94. Filed May 7, 1997.
Rocco J. Labella and Arthur P. Zucker, for petitioner.
Frank A. Racaniello, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
SWIFT, Judge: Respondent determined a deficiency of
$337,474 in the Federal estate tax of the Estate of decedent
Lieselotte Kohlsaat.
Unless otherwise indicated, all section references are to
the Internal Revenue Code in effect for June 5, 1990, the date of
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decedent’s death, and all Rule references are to the Tax Court
Rules of Practice and Procedure.
After settlement of some issues, the issue for decision is
whether, in the computation of petitioner’s Federal estate tax,
decedent’s inter vivos transfer of property to an irrevocable
trust is eligible under section 2503(b) for the annual gift tax
exclusion with respect to each of 16 contingent beneficiaries of
the trust.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found.
Petitioner is the Estate of Lieselotte Kohlsaat, deceased, Peter
Kohlsaat, coexecutor. Decedent died a resident of New Jersey.
When the petition was filed, Peter Kohlsaat resided in Cresskill,
New Jersey.
On March 27, 1990, decedent formed the Lieselotte Kohlsaat
Family Trust as an irrevocable trust (the trust) and transferred
to the trust a commercial building owned by decedent and managed
for many years by various Kohlsaat family members. At the time
of decedent’s transfer of the building to the trust, the building
was valued at $155,000. Thereafter, no other transfers were made
to the trust.
Under provisions of the trust, Beatrice Reinecke (Beatrice)
and Peter Kohlsaat (Peter), decedent’s two adult children, were
designated as cotrustees and primary beneficiaries of the trust.
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Beatrice and Peter each received an interest in one-half of the
corpus and income of the trust, and each received a special power
to appoint the corpus of his or her one-half share of the trust
to his or her children or grandchildren.
Under the trust provisions, 16 contingent remainder
beneficiaries were designated. Beatrice’s three children and
eight grandchildren were designated as contingent remainder
beneficiaries in Beatrice’s one-half share of the trust, and
Peter’s spouse and four sons were designated as contingent
remainder beneficiaries in Peter’s one-half share of the trust.
Beatrice and Peter, as well as the 16 contingent
beneficiaries, were each given the right -- following each
transfer of property to the trust -- to demand from the trust an
immediate distribution to them of property in an amount not to
exceed the $10,000 annual gift tax exclusion under section
2503(b) that was considered to be available to each beneficiary.
Each beneficiary’s right to demand a distribution lapsed 30 days
after a transfer of property to the trust. The guardian of any
minor beneficiary was authorized to exercise the minor
beneficiary’s right to demand a distribution of property from the
trust.
On April 2, 1990, within 6 days of decedent’s transfer of
the commercial building to the trust, the beneficiaries of the
trust were timely notified of their rights to demand
distributions of trust property of up to $10,000 each. None of
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the beneficiaries exercised his or her right to demand a
distribution from the trust, and none of the beneficiaries
requested notification of future transfers of property to the
trust.
No understandings existed between decedent, the trustees,
and the contingent beneficiaries to the effect that the
beneficiaries would not exercise their rights to demand
distributions from the trust.
On petitioner’s Federal estate tax return, petitioner
treated the interests of the 16 contingent beneficiaries as
qualifying for 16 annual gift tax exclusions under section
2503(b) with regard to decedent’s 1990 transfer of the commercial
building to the trust.
On audit of petitioner’s Federal estate tax return,
respondent denied the above 16 annual gift tax exclusions claimed
by petitioner on the grounds that the contingent beneficiaries
did not hold present interests in the trust.
OPINION
Generally, the annual gift tax exclusion under section
2503(b) applies to gifts made in trust. Helvering v. Hutchings,
312 U.S. 393, 396-397 (1941); sec. 25.2503-2(a), Gift Tax Regs.
The annual exclusion provides that gifts made to
beneficiaries during a calendar year shall be excluded from
taxable gifts to the extent they do not exceed $10,000 per
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beneficiary per year. Sec. 2503(b); sec. 25.2503-2(a), Gift Tax
Regs. Gifts qualifying for the annual exclusion are not counted
in the computation of an estate’s Federal estate tax liability.
Sec. 2001(b).
Only gifts of present interests in property qualify for the
annual gift tax exclusion. Gifts of future interests in property
(i.e., interests in property that are limited to commence in use,
possession, or enjoyment at some future date) do not qualify for
the annual exclusion. Sec. 2503(b); sec. 25.2503-3(a), Gift Tax
Regs.
Generally, interests in property qualify as present
interests in property where they represent the unrestricted right
to immediate use, possession, or enjoyment of property or income
from property. Sec. 25.2503-3(b), Gift Tax Regs.
Where trust beneficiaries, including minor and contingent
beneficiaries, are given unrestricted rights to demand immediate
distributions of trust property, the beneficiaries generally are
treated, under section 2503(b), as possessing present interests
in property. Estate of Cristofani v. Commissioner, 97 T.C. 74,
84-85 (1991); see also Crummey v. Commissioner, 397 F.2d 82, 88
(9th Cir. 1968), affg. in part and revg. in part T.C. Memo. 1966-
144; Perkins v. Commissioner, 27 T.C. 601, 605-606 (1956).
In Estate of Cristofani v. Commissioner, supra, contingent
beneficiaries of a trust were given the unrestricted right to
legally demand immediate distribution to them of trust property
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following a transfer of property to the trust. The contingent
beneficiaries were treated as holding present interests in the
trust, and the settlor’s transfers of property to the trust were
treated as qualifying for the annual gift tax exclusion.
Generally, the Commissioner’s determinations are presumed
correct, and the taxpayer bears the burden of proving otherwise.
Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).
Respondent argues that understandings existed between
decedent and the 16 contingent beneficiaries of decedent’s trust
to the effect that the beneficiaries would not exercise their
rights to demand distributions of trust property, that these
understandings negate decedent’s donative intent, and that the
substance-over-form doctrine should apply to deny the annual gift
tax exclusions with regard to the interests held by the 16
contingent beneficiaries.
We disagree.
Pursuant to the provisions of the trust, for a 30-day period
following a transfer of property to the trust, the contingent
beneficiaries were given unrestricted rights to legally demand
immediate distribution to them of trust property. The evidence
does not establish that any understandings existed between
decedent and the beneficiaries that the contingent beneficiaries
would not exercise those rights following a transfer of property
to the trust. At trial, several credible reasons were offered by
the trust beneficiaries as to why they did not exercise their
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rights to demand a distribution of trust property. The fact that
none of the beneficiaries exercised their rights or that none of
the beneficiaries requested notification of future transfers of
property to the trust does not imply to us that the beneficiaries
had agreed with decedent not to do so, and we refuse to infer any
understanding.
The evidence does not support respondent’s contention that
the contingent beneficiaries believed they would be penalized for
exercising their rights to demand distributions of trust property
or that the trustees purposefully withheld information from the
beneficiaries.
Further, the contingent beneficiaries received actual notice
from the trustees with regard to their rights. Decedent intended
to benefit the contingent beneficiaries by giving them interests
in the trust. The contingent beneficiaries were decedent’s
relatives.
For the reasons stated above, the contingent beneficiaries’
unrestricted rights to demand immediate distributions of trust
property are to be treated as present interests in property.
Decedent’s transfer of the commercial building to the trust
qualifies for 16 annual gift tax exclusions under section 2503(b)
with regard to the present interests of the 16 contingent
beneficiaries therein.
To reflect the foregoing,
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Decision will be entered
under Rule 155.