*234 Decision will be entered that there is a deficiency in gift tax for 1953 in the amount of $ 1,927.52.
1. The petitioner made a gift in 1953 by the transfer of $ 66,000 in cash to a trust. The initial commission of a trustee was $ 750. Held, the amount of the gift for gift tax purposes was the value of the property which passed from petitioner at the time of the transfer, $ 66,000, undiminished by the trustee's initial commission for receiving the trust property.
2. Held, the gifts of interests of the minor grandchildren of the petitioner in trust income are gifts of future interests and no exclusions therefore are allowable under section 1003(b)(3). Held, further, that the gifts of interests in trust income, including a gift of a present right to receive income to petitioner's son, cannot be valued for the purpose of exclusions under section 1003(b)(3) because of the trustees' unlimited discretion to disburse all or part of trust corpus.
*629 The respondent determined a deficiency in gift tax for the taxable year 1953 in the amount of $ 1,770.02. By amended answer, the respondent has made claim for increase in the deficiency, under section 272(e) of the 1939 Code, to $ 1,927.52.
The questions to be decided are as follows: (1) Whether the amount of the petitioner's gift in trust in 1953 was $ 66,000, undiminished by the initial commission of $ 750 of the corporate trustee. (2) Whether three gift tax exclusions of $ 3,000, each, or $ *236 9,000, are allowable under section 1003(b)(3) of the 1939 Code with respect to life interests in a trust created by the petitioner in 1953.
FINDINGS OF FACT.
The petitioner, a resident of New York City, New York, filed a gift tax return for the calendar year 1953 with the district director of internal revenue for Lower Manhattan.
David Schayek is the son of the petitioner. He was born on December 29, 1919. As of April 14, 1953, his only children were Valerie Joyce and Deborah Charlotte. The birth dates of Valerie and Deborah are March 26, 1950, and February 4, 1953, respectively.
David Schayek and his two daughters are and were, at all times material, nationals and residents of Great Britain.
On April 14, 1953, the petitioner executed and delivered a trust agreement dated April 14, 1953, by which she created an irrevocable trust. The trustees of the trust are the City Bank Farmers Trust Company of New York and Louise Schayek, the petitioner's daughter. The trust agreement is incorporated herein by this reference.
*630 The petitioner, as the settlor, transferred and delivered to the trustees at the time of the creation of the trust cash in the amount of $ 66,000, to be held*237 in trust, and the original trust corpus consisted of that amount of cash.
It is provided in article 10 of the trust agreement that any individual trustee shall not be entitled to any compensation for her or his services. It is also provided that the corporate trustee, the City Bank Farmers Trust Company, shall be entitled to receive as compensation for its services the commissions allowed to a sole trustee of an express trust by the laws of New York, to be taken and charged as provided by law, except that at the inception of the trust the trust company shall be entitled to retain out of the initial principal of the trust a commission for receiving such principal.
Pursuant to article 10, the City Bank Farmers Trust Company immediately received $ 750 out of the principal of $ 66,000 as its initial commission.
In her gift tax return for 1953, the total amount of the transfer in trust on April 14, 1953, was reported as $ 65,250, i.e., $ 66,000 less the corporate trustee's initial commission of $ 750.
In the statutory deficiency notice, the respondent determined that the total amount of the gift in trust was $ 65,250. By amendment to his answer, the respondent affirmatively alleged that*238 the correct amount of the total gift in trust was $ 66,000, without any reduction thereof for the corporate trustee's initial commission, and that a determination that the total gift was $ 66,000 will result in a deficiency in gift tax in the amount of $ 1,927.50, provided it is determined that total exclusions in the amount of $ 9,000 are not allowable under section 1003(b)(3).
The trust agreement provides, in the material part, as follows: The trust shall continue during the lives of the settlor's son, David, and his daughter, Valerie, and during the life of the survivor of them. During such trust term, the trustees shall invest, reinvest, and manage the trust principal.
The primary beneficiaries of the trust are David and his children. When the trust was created in 1953, David's two children were minors. One was about 3 years old, and the age of the other was about 3 months. There was no legally appointed guardian of the minors.
The beneficiaries are given interests in both the income and the principal of the trust.
David's interest in the trust income in the first instance is a life estate; Valerie's interest in the trust income is in the first instance for life; and Deborah's*239 interest in the income is in the first instance for the term of the trust.
*631 Under article 5 of the trust agreement the trustees are expressly authorized and empowered, at any time and from time to time, to apply to the use of David and/or any one or more of his issue such amount or amounts of the principal, without limitation and including the whole thereof, as the trustees shall determine in their absolute discretion.
Under the trust agreement, the administration of the trust is by the trustees, who are the corporate trustee and the individual trustee. However, article 2 makes provision for the payment of all of the trust income by the trustees to the individual trustee if the individual trustee elects, by giving written notice to the corporate trustee, to render the provisions of article 2 operative for a specified period of time. During any period that the provisions of article 2 shall be in operation the powers conferred on the trustees by article 5 (relating to the application of principal to the use of any of the beneficiaries) shall be exercisable by the individual trustee in her sole and absolute discretion.
Subsection B of article 1 of the trust agreement provides*240 in general how the net income of the trust shall be applied. Under subsection B, the interest of David in the trust income is one-half thereof, and the combined interest of his issue in the trust income is one-half thereof, which interest is to be shared by his issue in equal parts per stirpes. Upon the death of David during the term of the trust, all of the net income shall be applied to the use of his surviving issue in equal shares per stirpes.
From the time of the creation of the trust up to the time of the trial of this case, i.e., during each of the years 1953 through and including 1958, all of the net income of the trust (after expenses and a reserve for income taxes) was distributed currently to or for the benefit of the three beneficiaries, David, Valerie, and Deborah, as follows:
| Net Income After Expenses and Reserves for Taxes | ||||
| Year | David | Valerie | Deborah | Total |
| 1953 | $ 782.10 | 391.05 | $ 391.05 | $ 1,564.20 |
| 1954 | 1,116.35 | 558.18 | 558.17 | 2,232.70 |
| 1955 | 1,370.96 | 685.49 | 685.48 | 2,741.93 |
| 1956 | 1,322.24 | 661.12 | 661.13 | 2,644.49 |
| 1957 | 1,432.28 | 716.14 | 716.14 | 2,864.56 |
| 1958 | 1,399.15 | 699.58 | 699.58 | 2,798.31 |
The distributions of trust income were made*241 in each year by transfers of funds from the City Bank Farmers Trust Company to a bank in London. The distributions to the two minor children were made to David for their benefit and the distributions of income to which David was entitled were made to him.
*632 After the creation of the trust, the cash given to the trust by the settlor was invested in securities.
No distributions out of the principal, or corpus, of the trust were made during the years 1953-1958, inclusive.
During the years 1953-1958, inclusive, Louise Schayek, the individual trustee, did not at any time exercise her right under article 2 to act as the sole trustee to receive and distribute (according to her discretion) the net income of the trust to the beneficiaries, and the provisions of article 2 were not in operation in any respect. The trust was administered during the above years by the corporate and individual trustees.
During the years 1953-1958, inclusive, and thereafter, there were in existence in Great Britain foreign exchange controls which prohibited the receipt and retention of United States dollars by a resident of Great Britain, and upon the transfer of dollars to Great Britain a resident could*242 receive such funds only in sterling in the amount determined by the official rate of exchange. When the petitioner created the trust, she was advised by her attorney of the existing British foreign exchange regulations, of British income tax provisions, and about the then remoteness of the possibility that British foreign exchange controls would be removed so as to permit a resident of Great Britain to receive and retain United States dollars.
The Interest of David in the Trust Income.
Subject only to the provisions of article 2 of the trust agreement, David was entitled to receive currently during his life one-half of the net income of the trust. In the event that none of his issue should be living during the term of the trust, he is entitled to receive all of the net income currently.
Article 2 of the trust agreement gives the individual trustee the power to elect at any time, for a specified period of time, to make the provisions of article 2 operative, and in the event that such provisions become operative she is to receive all of the net income of the trust applicable to the use of David and his issue. Upon the receipt of all of the trust income, the individual trustee*243 alone shall be charged with the application, payment, and distribution of such net income to or for the use of David or his issue; and the individual trustee is empowered to apply to the use of David only so much of the current net income received for his benefit as she, in her sole discretion, shall determine from time to time. If the individual trustee determines that all or part of the current net income received for David's benefit shall not be applied to his use or distributed to him, she shall accumulate such net income in a special, separate bank account in her own name. With respect to net income *633 for the benefit of issue of David, the individual trustee has the same discretion to apply all or part of such income for the use of a child, and to hold in a special, separate bank account in her own name any net income not currently applied for the use of such child.
The Interests of David's Issue in Trust Income.
Article 7 of the trust agreement provides inter alia that --
the Trustees in their discretion may apply to the use of such [a] minor so much of * * * the income therefrom [from principal] as they may deem advisable. The Trustees may make payment *244 of any income * * * applicable to the use of any minor under this Article or any other Article of this agreement by paying the same to a parent, guardian, or to any other person having the care and control, of such minor * * *, or by expending it in such manner as the Trustees in their absolute discretion believe will benefit such minor, and may also pay to the minor directly such sums as the Trustees may consider suitable as an allowance. The Trustees may also accumulate for the minor's benefit any income which they may deem unnecessary otherwise to apply to such minor's use. [Emphasis supplied.]
The Interests of All Beneficiaries in Trust Principal.
The interests of all of the beneficiaries in trust principal are defined in articles 5 and 7.
With respect to the payment of any of the trust principal to a beneficiary who is a minor, article 7 provides that the trustees "may defer payment of principal vesting in and payable to a minor until such minor becomes of age, but the Trustees in their discretion may apply to the use of such minor so much of such principal * * * as they may deem advisable." The trustees may make payment of any principal applicable to the use of any *245 minor by paying the same to a parent, guardian, or any other person having the care and control of such minor, or the trustees may expend such principal in such other manner as the trustees believe, in their absolute discretion, will benefit such minor.
Article 5 of the trust agreement, which is set forth hereinafter, gives the trustees broad powers to make distributions from the principal of the trust for the use of any beneficiary, or all beneficiaries, at any time and from time to time in such amount or amounts, without limitation, as they shall determine in their absolute discretion. In making any decision about the application of principal to the use of David or of any one or more of his issue, the trustees "may consider the interests of the person or persons who will benefit from such application, to the exclusion of the interests of any and all other persons." The entire provisions of article 5 are as follows:
5. Except as hereinafter in this Article 5 provided, the Trustees are hereby expressly authorized and empowered at any time and from time to time, to apply to the use of the said David Schayek and/or of any one or more of his *634 issue, from the principal of the*246 trust hereunder, in such manner as they shall think fit, such amount or amounts without limitation and including the whole thereof, as the Trustees in their absolute discretion shall determine. In making any decision with respect to the application of principal to the use of the said David Schayek and/or any one or more of his issue, the Trustees may consider the interests of the person or persons who will benefit from such application, to the exclusion of the interests of any and all other persons. The Trustees may base their decision upon such evidence or information of whatsoever nature as they may think fit to accept or use, which evidence or information may, if they think fit, include or consist solely of any statement made by the said David Schayek or any adult child of his. The Trustees shall in no case be required to give any reason for any decision made by them hereunder, and in making any such decision they may consider such facts and circumstances as they in their sole and absolute judgment shall deem advisable and may disregard any and all other facts and circumstances notwithstanding that they would otherwise be relevant. Any decision made by the Trustees pursuant*247 to the provisions of this Article shall be final and shall be binding and conclusive upon any and all persons interested hereunder and shall not be subject to review. Notwithstanding the foregoing, during any period that the provisions of Article 2 shall be in effect as provided in said Article, the powers conferred on the Trustees under this Article 5 shall be exercisable by the individual Trustee in her sole and absolute discretion, and the corporate Trustee shall be fully protected in acting upon any determination made by the individual Trustee without any further inquiry or investigation and without regard to whether or not such corporate Trustee is in accord with such decision.
In her gift tax return for 1953, the petitioner took total exclusions of $ 9,000 on the basis of exclusions of $ 3,000 for each beneficiary-donee. In determining the deficiency in gift tax, the respondent disallowed the exclusions in the entire amount of $ 9,000 for the reason that the gifts in trust under the trust agreement constituted gifts of future interests.
OPINION.
Issue 1. -- The first question is whether the amount of petitioner's gift to the trust was $ 66,000, or $ 65,250. The petitioner*248 contends that the initial commission of the corporate trustee, $ 750, was not a gift and properly is to be excluded from the total amount of the property transferred to the trust. The respondent contends that the value of the amount of the property transferred by the donor as of the date of the transfer, namely $ 66,000, constitutes the amount of the gift, that the trustee's commission of $ 750 was incident to the administration of the newly created trust, and that an expense incident to the administration of a trust does not diminish the value of the property transferred to the trust or the amount of the gift for gift tax purposes. Neither party cites any case in support of his contention.
The respondent relies upon an estate tax ruling promulgated in 1935, E.T. 7, XIV-1 C.B. 382, which states as follows:
*635 Where a gift consists of a transfer of property in trust, the amount of the gift for the purpose of computing gift tax is the value of the property at the date of transfer undiminished by trustees' commissions.
* * * *
The value of the property transferred as of the date of transfer constitutes the amount of the gift. The tax, being imposed upon the transfer by the *249 donor, must be computed upon the value of the property passing from the donor. The fact that the value received by the donee may be less than that passing from the donor does not alter the basis of computation. Where the gift consists of a transfer of property in trust, expenses incident to the administration of the trust do not diminish the value of the property transferred or the amount of the gift for gift tax purposes. It is accordingly held that where a gift consists of a transfer of property in trust, the amount of the gift, for gift tax purposes, is the value of the property at the date of transfer undiminished by trustees' commissions for receiving and disbursing the trust property.
The respondent's contention that the value or amount of the petitioner's gift in trust was $ 66,000 is correct. As a matter of fact, the property transferred to the trust is described in the trust agreement, schedule A, as $ 66,000 in cash.
The gift tax is a tax "imposed upon the transfer * * * by any individual * * * of property by gift." Section 1000(a) of the 1939 Code and Regulations 108, section 86.3, provide that the tax is an excise upon the donor's act of making the transfer, and is *250 measured by the value of property passing from the donor; and that the tax is not imposed upon the receipt of property by the donee, nor is it measured by the enrichment resulting to the donee from the transfer. The cited provision in the regulation is the same as the first paragraph of Regulations 79, article 3; both are a long-standing interpretation of the gift tax statute which has continued for many years without change; the regulation is deemed to have received congressional approval and to have the effect of law. Helvering v. Winmill, 305 U.S. 79">305 U.S. 79. The respondent's determination is in accord with the pertinent part of the regulation.
The petitioner gave up and relinquished control over $ 66,000. The gift tax is to be measured by that amount.
The petitioner made her transfer of $ 66,000 to a trust. The $ 750 initial commission of the corporate trustee was an administrative expense of the trust which was to be taken into account in computing its net income (sec. 162(a); Regs. 111, secs. 29.161-1 (a) and (b), and 29.162-1), and such expense, incident to the administration of the trust, did not diminish the value of the property transferred *251 by gift or the amount of the gift for gift tax purposes. The respondent's contention here is correct.
Issue 2. -- Section 1003(b)(3), governing gifts made after 1942, provides that the first $ 3,000 of gifts to any donee in each calendar year shall not be included in determining the amount of total gifts made during the year, but this annual exclusion is expressly limited *636 to gifts other than gifts of future interests in property. The issue is whether the petitioner is entitled to three exclusions of $ 3,000, each.
When the trust was created in 1953, there were three beneficiaries, of whom one was an adult and two were minors, therefore, three donees of the petitioner's gift in trust. The respondent concedes that the adult beneficiary, David, received a present interest in trust income. His concession is based upon the provisions of section 16 of the Personal Property Law of New York which prohibits all accumulations of trust income except accumulations for minors and in other instances not material here. 40 McKinney's Consolidated Laws of New York 145; In re United States Trust Co. of New York, 53 N.Y.S.2d 262">53 N.Y.S. 2d 262. Under New York law, *252 the provision in article 2 that the individual trustee (if she elected to make its provisions operative) could in her discretion accumulate all or part of the trust income in which David received an interest under the trust and hold such accumulations in a separate account for him was invalid. Except for the provisions of article 2, David had an immediate and unqualified right to receive currently one-half of the net income of the trust. The petitioner's gift to him was a present interest. Commissioner v. Brandegee, 123 F. 2d 58. However, it is the respondent's contention that David's present interest in the trust income cannot be valued because articles 5 and 2 give the trustees, or the individual trustee, sole and uncontrolled discretion, not limited by any ascertainable standard, to distribute part or all of the income-producing corpus, thereby cutting off his share of income, and, therefore, an exclusion under section 1003(b)(3) is not allowable. The period of the existence of David's right to receive income could be terminated at any time; the period of the existence of that right cannot be determined; under such circumstances there is no*253 method for valuing his interest in income. Respondent cites as authority for his position the following cases: Evans v. Commissioner, 198 F. 2d 435, affirming 17 T.C. 206">17 T.C. 206; Herrmann's Estate v. Commissioner, 235 F.2d 440">235 F. 2d 440; LaFortune v. Commissioner, 263 F. 2d 186, affirming 29 T.C. 479">29 T.C. 479; and Jennie Brody, 19 T.C. 126">19 T.C. 126.
With respect to the gift of trust income to the two minor children, it is the respondent's position that their interests in income were future interests because under articles 7 and 2, the trustees (or trustee) were given the right to "accumulate for the minor's benefit any income which they may deem unnecessary otherwise to apply to such minor's use." In the alternative, respondent contends that if the minor beneficiaries received present interests in income, such interests were incapable of valuation for the same reasons already stated with respect to David's interest.
The petitioner takes the position that the Evans case should not be followed. She contends, further, that there*254 was an understanding *637 between her and the individual trustee that no principal would be paid to any of the beneficiaries until the British foreign exchange controls are removed and the beneficiaries are permitted to receive and retain dollars, and that effect should be given to this oral understanding. Although we deem it unnecessary to set forth petitioner's arguments at length, consideration has been given to them. Petitioner relies upon William H. Robertson, 26 T.C. 246">26 T.C. 246; and Hugh McK. Jones, 29 T.C. 200">29 T.C. 200.
Consideration is given first to the interests of the two minors in trust income. If these interests are present interests, the beneficiaries must have the immediate right to receive, use, possess, or enjoy the income, Fondren v. Commissioner, 324 U.S. 18">324 U.S. 18, 20; Commissioner v. Disston, 325 U.S. 442">325 U.S. 442, or, at the very least, someone standing in the shoes of a beneficiary, such as a parent or a guardian must under the trust agreement have the unqualified right to make effective demand at any time for the immediate use, possession, and enjoyment*255 by the beneficiaries of the income. Cf. George W. Perkins, 27 T.C. 601">27 T.C. 601, where such right existed; Stifel v. Commissioner, 197 F.2d 107">197 F. 2d 107, affirming 17 T.C. 647">17 T.C. 647, where there was no person who could make such effective demand for the immediate enjoyment of the beneficiaries.
Although the trustees are authorized in article 1 to apply to the use of the issue of David, "from time to time," one-half of the trust income in equal shares, they are given the sole discretion, by article 7, to apply only so much of the income to their use during their minority, as they may deem advisable, and they may also accumulate any income which they may deem unnecessary otherwise to apply to a minor's use. All of the trust provisions dealing with the minor beneficiaries' rights to receive income must be considered in determining the right with which each beneficiary was endowed. It is now well settled that "where a donee's enjoyment and use of a gift are subject to the exercise of the discretion of a trustee, the donee's interest is a future interest and the statutory exclusion has been denied." Frances McGuire Rassas, 17 T.C. 160">17 T.C. 160, 164,*256 affd. 196 F. 2d 611; Willis D. Wood, 16 T.C. 962">16 T.C. 962; Commissioner v. Brandegee, supra; and William Goehner, 28 T.C. 542">28 T.C. 542. On the face of the provisions of article 5 of the trust, the minor beneficiaries' interests in the trust income are future interests, and it must be concluded that the reasoning of Fondren v. Commissioner, supra, and Commissioner v. Disston, supra, applies here.
We are not unmindful of the fact that during each year from the creation of the trust through 1958, the trustees have made distributions of the entire net amount of the trust income to all of the three beneficiaries. That circumstance means only that the trustees did *638 not exercise their power to accumulate any part of each minor's share of the current net income. It is a circumstance which cannot be recognized as determinative of the question. In the Disston case it was noted that the taxpayer claiming the exclusion has the burden of showing that "the value of what he claims is other than a future interest," *257 and that in the absence of some indication from the face of the trust or surrounding circumstances "that a steady flow of some ascertainable portion of income to the minor would be required there is no basis for a conclusion that there is a gift of anything other than for the future." (Emphasis supplied.) Under the provisions of article 7, the trustees may at any time determine that the minor's share of trust income shall be accumulated, and such power and discretion of the trustees negates the existence of a present right to continuously have the use and enjoyment of the income.
We must conclude, applying the test stated in the Fondren case, that certain provisions in article 7 of the trust agreement constitute a barrier between "the will of the beneficiary or donee now to enjoy what has been given him and that enjoyment" and, therefore, the power of the trustees to withhold in any year they deem best and accumulate income makes the gifts of income to the minor beneficiaries' future interests.
It is necessary to consider also whether the gift of trust income to David is capable of evaluation. What is concluded in this respect is equally applicable to whether the interests*258 of the minors in the trust income are capable of valuation, if their interests could be held to be present interests (which we have concluded above, however, cannot be done).
Because of the provisions of article 5 of the trust agreement, which empower the trustees to apply to the use of David or any one or more of the other beneficiaries, an amount or amounts of the trust principal, without limitation and including the whole of the principal, it must be concluded that the interest of each beneficiary in the trust income, David and each of his minor children, is incapable of valuation and, therefore, no exclusions under section 1003(b)(3) are allowable.
A taxpayer claiming exclusions under section 1003(b)(3) must show not only the right to the exclusion but the amount thereof. Commissioner v. Disston, supra.Article 5 of the trust agreement gives the trustees (or the individual trustee under article 2) the power to distribute at any time all or part of the corpus to David or any of his issue. Accordingly, it is within the power of the trustees to wipe out at any time the gift of trust income to any or all of the beneficiaries, or to reduce the amount*259 of the income-producing corpus and the income. There is no standard in the trust *639 agreement which defines or limits the power of invasion of corpus by the trustees, and in this respect the case of William H. Robertson, supra,Hugh McK. Jones, supra, and J. J. Newlin, 31 T.C. 451">31 T.C. 451, are distinguishable from this case. It is concluded that the gifts of income to each of the beneficiaries of the trust cannot be valued because the trustees could, pursuant to the discretion granted in article 5, destroy the income interests at any time by an exercise of their unlimited discretion to distribute corpus. Since the interests in income cannot be valued, no exclusions may be allowed with respect to them and we so hold. Jennie Brody, supra at 132; Evans v. Commissioner, supra;Herrmann's Estate v. Commissioner, supra;LaFortune v. Commissioner, supra;Kniep v. Commissioner, 172 F.2d 755">172 F. 2d 755, 757, affirming 9 T.C. 943">9 T.C. 943;*260 and Margaret A. C. Riter, 3 T.C. 301">3 T.C. 301.
The petitioner seeks to avoid the above conclusion by asserting that there is an oral understanding on the part of the individual trustee with the petitioner donor of the trust that no distributions of trust corpus will be made as long as the British foreign exchange controls prohibit a resident of Great Britain from receiving and retaining United States dollars. The petitioner also urges us to take judicial notice of economic facts which in 1953 made the lifting of such foreign exchange controls a then very remote possibility. Consideration has been given to this contention but we are unable to give it the effect sought by the petitioner. It is our view that the question must be decided solely upon consideration of the written trust agreement. Even if we could find and conclude properly that the written trust agreement was supplemented or modified by an oral agreement between the petitioner and her daughter, the individual trustee, which we do not regard as necessary to decide, we would not conclude that the alleged oral agreement was one which could effectively restrain the trustees from exercising the express*261 power given them to invade and distribute corpus in their sole discretion. In our opinion it is unlikely that in the face of the existence of actual needs of a beneficiary for the application of trust corpus to satisfy such needs, the trustees would fail to exercise their power to disburse corpus, or could be enjoined from doing so, merely because the beneficiary could not under British foreign exchange controls receive such distribution in and retain United States dollars. This contention of the petitioner strikes us as being singularly without merit and lacking in practicality in view of the broad powers given to the trustees in the written trust agreement. The petitioner was advised about the existence of the British foreign exchange controls before she executed the trust agreement.
*640 The respondent's determinations denying three exclusions under section 1003(b)(3) for gifts of interests in trust income are sustained.
Decision will be entered that there is a deficiency in gift tax for 1953 in the amount of $ 1,927.52.