Commissioner v. Disston

Background

William D. Disston, a father, set up trusts in 1936, 1937, and 1938 for his five children, three of whom were minors in 1936 and two in 1938. The trusts divided principal into equal shares, restricted beneficiaries from selling or assigning their shares, and directed trustees to accumulate income until age twenty-one while permitting trustees to pay income for a minor’s education, comfort, and support. Payouts of principal were delayed (for example, a partial payout at age forty-five) and trustees could invade up to ten percent of principal in emergencies. The Commissioner disallowed $5,000 present-interest exclusions for the minors’ gifts in 1937 and 1938 and adjusted earlier 1936 exclusions; the Tax Court upheld that position, the Court of Appeals reversed, and the Supreme Court reviewed the question.

Reasoning

The Court relied on the tax rule that a “future interest” is an interest that begins enjoyment at a future date. It found the trusts’ principal clearly postponed enjoyment because minors had no present right to the corpus and payouts depended on surviving to later ages or on appointment to unspecified persons. The limited emergency power to invade up to ten percent did not create a predictable present benefit. Although trustees could pay income for support, the Court concluded the instrument and the trustees’ practice showed no ascertainable, steady portion of income would be paid to the minors. The taxpayer bears the burden of proving any present interest, and he failed to do so; the Court treated the minors’ gifts as future interests and disallowed the $5,000 exclusions.

Real world impact

The decision means donors who create similar trusts cannot claim the $5,000 present-interest exclusion for minor beneficiaries unless they can show a clear, definite present right to income. It also permits tax authorities to adjust prior years’ net gift totals when calculating gift tax for later years, even if direct collection for those earlier years is barred.