Estate of Levine v. Commissioner

1
Estate of Levine v. Commissioner

• 536 F.2d 717 (1975)
• Kaufman, Chief Judge
• Anderson, Circuit Judge
• Van Graffeiland, Circuit Judge

2
Case History

• IRS assesses additional tax on taxpayers.
• Tax Court rules for the taxpayers.
• IRS appeals to the 2nd Circuit Court of Appeals
• Court of Appeals rules for IRS

3
Case Facts

• December 20, 1968 David Levine establishes five
  identical irrevocable trusts for his five
  grandchildren
• Corpus of trust consists of New Haven Moving
  Equipment Corporation stock
• All income was to be held by the trust until the
  beneficiary reached age 21 when all accumulated
  income would be distributed.

4
Case Facts

• If the grandchild died before reaching 21 years
  of age, the income was to go to the grandchilds
  estate
• The status of the corpus of the trust was up to
  the exclusive discretion of the Independent
  Trustee
• Beneficiary had a limited power of appointment in
  case any corpus remained at his or her death
  must go to a lineal descendant of David Levine

5
Case Facts

• I.R.C. 2513 permits a married couple to treat
  a gift made by one spouse as if made half by each
  spouse a.k.a. gift splitting
• Levines elect 2513 treatment, each pay 34.17
  in tax
• Commissioner determines that Mrs. Levine was
  deficient by 160.72 and Mr. Levine was deficient
  by 1,026.31

6
Future Interests

• 2503(b) Permits donor to escape gift tax on
  the first 3,000 of gifts to each donee yearly,
  so long as the gift is not of future interests in
  property.
• Fondren v. CIR the question is when enjoyment of
  the property begins
• The gift is of a future interest if limited to
  commence in use, possession, or enjoyment at some
  future date or time.
• Remainder interest in trust future interest
• Income interest in trust present interest (if
  payment commence immediately)

7
Gifts to Minors

• 2503(c) Says that gifts to minors shall not be
  considered a gift of future interests if certain
  conditions are met
• Property and income may be expended by or for
  benefit of minor before 21 years of age, and
• If not expended, pass to the donee when he or she
  reaches age 21, and
• If donee dies before age 21, payable to estate of
  donee or may appoint under a general power of
  appointment

8
Division of Components

• In the Disston and Fondren cases, the Supreme
  Court said that a gift may be divided into
  component parts for tax purposes.
• Thus, the Levine trusts could be divided into the
  pre-21 income portion and the post-21 income
  portion.

9
Courts Decision

• The pre-21 income interest satisfies 2503(c).
• The post-21 income interest does not satisfy
  2503(c) because 1) the property (stock in corpus
  of trust) does not pass to the beneficiary at 21
  years of age, and 2) there is only a limited
  power of appointment instead of a general power
  of appointment, as required by the Code.

10
Conclusion

• The Court reverses the Tax Courts decision and
  remands the case back to the Tax Court
• The IRS wins taxpayer owes additional tax