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Fischer v. Commissioner of Internal Revenue

decided: April 13, 1961.

GEORGE FISCHER, PETITIONER,
v.
COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.



Author: Forman

Before BIGGS, Chief Judge, and GOODRICH, Circuit Judge, and FORMAN, Senior Circuit Judge.

FORMAN, Senior Circuit Judge.

The sole issue raised on this appeal is whether gifts in trust made by petitioner, George Fischer, were gifts of a present interest which will support a claim for three annual statutory exclusions of $3,000 each under § 1003(b)(3) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 1003(b)(3). The Tax Court rejected the claimed exclusions.

The material facts as stipulated by the parties and as found by the Tax Court may be summarized as follows:

In 1954, Fischer transferred two parcels of real property as a gift in trust for the benefit of each of his three adult daughters. The property was located in Staten Island, New York. The "net income" from the trust property was to be paid in equal quarterly shares to the three daughters as long as each lived and thereafter to their respective issue, or in the absence of issue to the surviving daughters or their issue. The corpus of the trust was to be distributed equally to the daughters 15 years from the date of the trust, but if any daughter died before that distribution her share was to be held in trust for her surviving issue until the latter attained 21 years of age.

The trust provided that Fischer should have no power to revoke, alter or amend the trust instrument or exercise any power over the trust estate. Nevertheless Fischer and the trustees entered into an agreement December 2, 1954, in which the term "net income" as used in the original trust instrument, was more clearly defined. The definition in the new agreement was "such cash net income as equals the excess of rents and other income to the trust corpus over and above disbursement and operating expenses and monies paid for amortization of any mortgages involved." Fischer also reserved the right to transfer additional property to the trust.

The trustees were given absolute discretion and authority to purchase, sell or exchange trust assets; to make investments which did not produce income or hold trust assets uninvested for any period of time; to charge any expenses or costs against principal or income to the extent that they could so do legally; to borrow such sums of money as they deemed advisable for any purpose, including the refinancing of real estate improvements; to pledge any trust property as security; and to improve, alter or rebuild any of the real property of the trust estate.

The trust indenture further provided that the "net income" of the trust was not to be paid to any beneficiary if she became bankrupt or insolvent or had alienated her interest by any means; in any such event that beneficiary's interest terminated and her former share of the income was to be used thereafter by the trustees in the amounts and as they deemed advisable for her support and maintenance or for the support and maintenance of her husband and children and any excess was to be distributed pro rata among the other beneficiaries.

Fischer reported in his gift tax return for 1954 the sum of $157,403.43 as the value on August 26, 1954, of the gifts in trust. He subtracted $9,000 as annual exclusions and $30,000 as a specific exemption, leaving a net taxable gift of $118,403.43. Attached to the gift tax return was a copy of the contract of sale dated June, 1954 according to which Fischer agreed to purchase the real property later transferred by him to the trust in question.The purchase price was $508,750 with $20,000 payable on the signing of the contract and $143,750 payable on the delivery of the deed. One parcel of property was to be subject to a first mortgage of $345,000 to be secured by the seller prior to sale. The mortgage was to bear interest at 4 1/2 per cent per annum and was to be amortized by quarterly payments of $6,460 each to be applied first to interest and the balance to principal. The sellers represented that the rentals were as shown on a separate schedule which stated that the total annual rental was $80,100 consisting of rents ranging from $90 to $140 on 60 apartments and $10 each for 35 garages. The sellers further represented that the annual expenses were as follows:

"Taxes $13,633.15

Fuel 4,599.97

Water and Sewerage 1,048.00

Electricity 669.54

Insurance ...


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