                          T.C. Memo. 1997-212



                        UNITED STATES TAX COURT



             ESTATE OF LIESELOTTE KOHLSAAT, DECEASED,
            PETER KOHLSAAT, COEXECUTOR, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 22465-94.                         Filed May 7, 1997.



     Rocco J. Labella and Arthur P. Zucker, for petitioner.

     Frank A. Racaniello, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:     Respondent determined a deficiency of

$337,474 in the Federal estate tax of the Estate of decedent

Lieselotte Kohlsaat.

     Unless otherwise indicated, all section references are to

the Internal Revenue Code in effect for June 5, 1990, the date of
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decedent’s death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

     After settlement of some issues, the issue for decision is

whether, in the computation of petitioner’s Federal estate tax,

decedent’s inter vivos transfer of property to an irrevocable

trust is eligible under section 2503(b) for the annual gift tax

exclusion with respect to each of 16 contingent beneficiaries of

the trust.


                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

Petitioner is the Estate of Lieselotte Kohlsaat, deceased, Peter

Kohlsaat, coexecutor.   Decedent died a resident of New Jersey.

When the petition was filed, Peter Kohlsaat resided in Cresskill,

New Jersey.

     On March 27, 1990, decedent formed the Lieselotte Kohlsaat

Family Trust as an irrevocable trust (the trust) and transferred

to the trust a commercial building owned by decedent and managed

for many years by various Kohlsaat family members.   At the time

of decedent’s transfer of the building to the trust, the building

was valued at $155,000.   Thereafter, no other transfers were made

to the trust.

     Under provisions of the trust, Beatrice Reinecke (Beatrice)

and Peter Kohlsaat (Peter), decedent’s two adult children, were

designated as cotrustees and primary beneficiaries of the trust.
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Beatrice and Peter each received an interest in one-half of the

corpus and income of the trust, and each received a special power

to appoint the corpus of his or her one-half share of the trust

to his or her children or grandchildren.

     Under the trust provisions, 16 contingent remainder

beneficiaries were designated.    Beatrice’s three children and

eight grandchildren were designated as contingent remainder

beneficiaries in Beatrice’s one-half share of the trust, and

Peter’s spouse and four sons were designated as contingent

remainder beneficiaries in Peter’s one-half share of the trust.

     Beatrice and Peter, as well as the 16 contingent

beneficiaries, were each given the right -- following each

transfer of property to the trust -- to demand from the trust an

immediate distribution to them of property in an amount not to

exceed the $10,000 annual gift tax exclusion under section

2503(b) that was considered to be available to each beneficiary.

Each beneficiary’s right to demand a distribution lapsed 30 days

after a transfer of property to the trust.    The guardian of any

minor beneficiary was authorized to exercise the minor

beneficiary’s right to demand a distribution of property from the

trust.

     On April 2, 1990, within 6 days of decedent’s transfer of

the commercial building to the trust, the beneficiaries of the

trust were timely notified of their rights to demand

distributions of trust property of up to $10,000 each.    None of
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the beneficiaries exercised his or her right to demand a

distribution from the trust, and none of the beneficiaries

requested notification of future transfers of property to the

trust.

     No understandings existed between decedent, the trustees,

and the contingent beneficiaries to the effect that the

beneficiaries would not exercise their rights to demand

distributions from the trust.

     On petitioner’s Federal estate tax return, petitioner

treated the interests of the 16 contingent beneficiaries as

qualifying for 16 annual gift tax exclusions under section

2503(b) with regard to decedent’s 1990 transfer of the commercial

building to the trust.

     On audit of petitioner’s Federal estate tax return,

respondent denied the above 16 annual gift tax exclusions claimed

by petitioner on the grounds that the contingent beneficiaries

did not hold present interests in the trust.


                                OPINION

     Generally, the annual gift tax exclusion under section

2503(b) applies to gifts made in trust.   Helvering v. Hutchings,

312 U.S. 393, 396-397 (1941); sec. 25.2503-2(a), Gift Tax Regs.

     The annual exclusion provides that gifts made to

beneficiaries during a calendar year shall be excluded from

taxable gifts to the extent they do not exceed $10,000 per
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beneficiary per year.    Sec. 2503(b); sec. 25.2503-2(a), Gift Tax

Regs.    Gifts qualifying for the annual exclusion are not counted

in the computation of an estate’s Federal estate tax liability.

Sec. 2001(b).

     Only gifts of present interests in property qualify for the

annual gift tax exclusion.    Gifts of future interests in property

(i.e., interests in property that are limited to commence in use,

possession, or enjoyment at some future date) do not qualify for

the annual exclusion.    Sec. 2503(b); sec. 25.2503-3(a), Gift Tax

Regs.

     Generally, interests in property qualify as present

interests in property where they represent the unrestricted right

to immediate use, possession, or enjoyment of property or income

from property.    Sec. 25.2503-3(b), Gift Tax Regs.

     Where trust beneficiaries, including minor and contingent

beneficiaries, are given unrestricted rights to demand immediate

distributions of trust property, the beneficiaries generally are

treated, under section 2503(b), as possessing present interests

in property.     Estate of Cristofani v. Commissioner, 97 T.C. 74,

84-85 (1991); see also Crummey v. Commissioner, 397 F.2d 82, 88

(9th Cir. 1968), affg. in part and revg. in part T.C. Memo. 1966-

144; Perkins v. Commissioner, 27 T.C. 601, 605-606 (1956).

        In Estate of Cristofani v. Commissioner, supra, contingent

beneficiaries of a trust were given the unrestricted right to

legally demand immediate distribution to them of trust property
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following a transfer of property to the trust.   The contingent

beneficiaries were treated as holding present interests in the

trust, and the settlor’s transfers of property to the trust were

treated as qualifying for the annual gift tax exclusion.

     Generally, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving otherwise.

Rule 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933).

     Respondent argues that understandings existed between

decedent and the 16 contingent beneficiaries of decedent’s trust

to the effect that the beneficiaries would not exercise their

rights to demand distributions of trust property, that these

understandings negate decedent’s donative intent, and that the

substance-over-form doctrine should apply to deny the annual gift

tax exclusions with regard to the interests held by the 16

contingent beneficiaries.

     We disagree.

     Pursuant to the provisions of the trust, for a 30-day period

following a transfer of property to the trust, the contingent

beneficiaries were given unrestricted rights to legally demand

immediate distribution to them of trust property.   The evidence

does not establish that any understandings existed between

decedent and the beneficiaries that the contingent beneficiaries

would not exercise those rights following a transfer of property

to the trust.   At trial, several credible reasons were offered by

the trust beneficiaries as to why they did not exercise their
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rights to demand a distribution of trust property.    The fact that

none of the beneficiaries exercised their rights or that none of

the beneficiaries requested notification of future transfers of

property to the trust does not imply to us that the beneficiaries

had agreed with decedent not to do so, and we refuse to infer any

understanding.

     The evidence does not support respondent’s contention that

the contingent beneficiaries believed they would be penalized for

exercising their rights to demand distributions of trust property

or that the trustees purposefully withheld information from the

beneficiaries.

     Further, the contingent beneficiaries received actual notice

from the trustees with regard to their rights.    Decedent intended

to benefit the contingent beneficiaries by giving them interests

in the trust.    The contingent beneficiaries were decedent’s

relatives.

     For the reasons stated above, the contingent beneficiaries’

unrestricted rights to demand immediate distributions of trust

property are to be treated as present interests in property.

Decedent’s transfer of the commercial building to the trust

qualifies for 16 annual gift tax exclusions under section 2503(b)

with regard to the present interests of the 16 contingent

beneficiaries therein.

     To reflect the foregoing,
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             Decision will be entered

        under Rule 155.
