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

3. Case Facts December 20, 1968 – David Levine establishes five identical irrevocable trusts for his five grandchildren 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 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. 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 grandchild’s estate If the grandchild died before reaching 21 years of age, the income was to go to the grandchild’s estate The status of the corpus of the trust was up to the exclusive discretion of the Independent Trustee 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 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” 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 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 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. § 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 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.” “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 Remainder interest in trust = future interest Income interest in trust = present interest (if payment commence immediately) 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 § 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 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 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 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. 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. Thus, the Levine trusts could be divided into the pre-21 income portion and the post-21 income portion.

9. Court’s Decision The pre-21 income interest satisfies § 2503(c). 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. 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 Court’s decision and remands the case back to the Tax Court The Court reverses the Tax Court’s decision and remands the case back to the Tax Court The IRS wins; taxpayer owes additional tax The IRS wins; taxpayer owes additional tax