ROBERT E. DARLING AND VIRGINIA K. DARLING v. THE UNITED STATES, 179 Ct. Cl. 891

Per Curiam: This case was referred to Trial Commissioner Herbert N. Maletz with directions to make findings of fact and recommendation for conclusions of law. The commissioner has done so in a report and opinion filed on January 16, 1967. Defendant has filed no exceptions or brief on this report and the time for so filing pursuant to the Rules of the court has expired. On- March 6, 1967, plaintiffs filed a motion that the court adopt the opinion, findings of fact and conclusion of law in this case.

Since the court agrees with the commissioner’s opinion, findings and recommended conclusion of law, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case without .oral argument. Plaintiffs are therefore entitled to recover and judgment is entered for plaintiffs with the amount thereof to be determined pursuant to Rule 47(c). OPINION OE COMMISSIONER Maletz, Commissioner: This case involves

section 170(b) (1) (

D) of the Internal Revenue Code of 1954 (26 U.S.C. § 170(b) (1) (D) (1958)) which provides in part that no charitable deduction may be taken by the grantor of a trust for the value of any interest in property transferred in trust if the grantor has a reversionary interest in the corpus or income which exceeds five per cent of the value of the property.

In issue is whether a grantor who creates irrevocable trusts which require a fixed amount to be paid to charity but which also give the corporate trustee discretion to apply trust income or corpus for the support, maintenance and education of the grantor’s children is entitled to charitable contribution deductions for income tax purposes. Resolution of this issue turns on whether the grantor had, within the meaning of

section 170(b) (1) (D), a reversionary interest in the trusts which had a value of over five per cent of the property transferred in trust. The facts are not in dispute. In November 1955, Robert E. Darling (hereafter referred to as plaintiff) established six similar irrevocable trusts consisting of two trusts for the ultimate benefit of each of his three then minor children. Plaintiff and a bank (hereafter referred to as the corporate trustee) were named as trustees.

Each of these trusts had a corpus of some $52,000 and was to continue until the death of tlie survivor of plaintiff’s wife and the child beneficiary. Upon the death of the survivor, the remainder was to be paid to a designated class of remaindermen. Each trust had a charitable charge of $11,000 which had to be paid, with interest, either from the income or principal of the trust within 44 years or less, the plaintiff retaining the power to choose the specific charitable donees and the portion of the charge each was to receive. Each payment to such donees reduced the charitable charge by the amount of the payment.

The trust instrument also gave the corporate trustee the right “in its absolute discretion” to apply “any or all” of the trust income or principal for the use of the plaintiff’s minor child-beneficiary’s “care, comfort, education and welfare.” No distribution could be made, however, if it would reduce the trust funds to an amount less than 150 per cent of the then unsatisfied charitable charge.

The trust provisions 'allowed the plaintiff to increase the charitable charge upon each trust at any time but only on condition that the amount of his contribution to principal equalled at least 150 per cent of the additional charge for charitable purposes. Pursuant to these provisions, plaintiff in January 1956 transferred stock worth some $45,000 to each of the six trusts, increasing the charitable charge of each trust by $12,000. In December 1956, plaintiff made an additional transfer to each of the trusts of stock worth some $12,000, increasing the charitable charge on each by $1,500.

In December 1957, plaintiff created three additional irrevocable trusts, one for the ultimate benefit of each of his three then minor children and his family. These trusts were identical except for the name of the child who was the beneficiary thereof, and their terms and provisions were generally the same as the six trusts created in November 1955. Each of these three trusts had a corpus of stock valued at approximately $114,000 and contained a charitable charge of $27,500.

In their joint income tax returns for the calendar years 1955, 1956 and 1957, plaintiff and his wife claimed charitable contribution deductions under

section 170 of the Internal Revenue Code of 1954 for the charitable charges imposed on the trusts for these years. These deductions were denied on the ground that the plaintiff had a reversionary interest in excess of five per cent of the principal or income of the trusts within the meaning of

section 170(b) (1) (

D) as defined by the regulations thereto; and a deficiency was assessed.

Section 170(b) (1) (

D) was a new provision which originated on the floor of the House in 1954 as an amendment to the bill (H.R. 8300) that was subsequently enacted as the Internal Revenue Code of 1954. See 100 Cong. Rec. 3560 (1954). As explained on the floor (ibid) : “[I]ts purpose is to plug the loophole which has been in existing law. The loophole was made more apparent at the time the committee adopted the liberalization policy in regard to charitable trusts created for a term of years with revisionary [sic] rights to the grantor.

Under existing law, by means of these term charity trusts, a grantor was able in effect to get two deductions, first for the amount which was deducted from his gross income and then again the same amount as a charitable deduction. This amendment simply provides that only one deduction, the deduction from gross income is granted, and the charitable deduction is not granted.” See also S. Eep. No. 1622, 83d Cong., 2d Sess., pp. 208-09 (1954) (3 U.S. Code Cong. & Adm. News, p. 4845 (1954)). Save for these statements of Congressional purpose, the legislative history of the

section throws little light upon the scope of its operation, and provides no indication as to what constitutes a reversionary interest or how it is to be valued. The regulation, however, defines a reversionary interest broadly to include a possibility that the trust property or its income will be subject to a power exercisable by a non-adverse party to use that property or the income for the benefit of the grantor. See note 4.

It is the defendant’s contention that the discretionary power given to the corporate trustee to distribute principal or income to the plaintiff’s minor children is a reversionary interest within the meaning of this regulation. Since the grantor has the legal obligation to support his children, defendant argues that there is a possibility that the trustee will use trust funds to meet this obligation and thereby use the corpus or income of the trust for the “benefit of the grantor” as these words are used in the regulation.

Plaintiff contends that such a discretionary power exercisable by a trustee does not fall within the definition of a “revisionary interest” as that term is used in the statute and regulation, and, in the alternative, that if the regulation covers such a discretionary power, it is invalid as an improper extension of the statute. Which contention is the correct one need not be decided, for even if it is assumed that such a discretionary support power in the hands of a trustee is a reversionary interest in the grantor for purposes of

section 170(b) (1) (D), it is clear from the record that the reversionary interest did not have a value in excess of five per cent of the value of the property transferred in trust. The defendant asserts that the computation of the value of plaintiff’s reversionary interest is a simple matter of arithmetic; it merely subtracts the charitable charge from the corpus of the trust to arrive at what it considers to be the value of the reversionary interest.

But such an arithmetic computation merely sets forth the value of the amount the corporate trustee could have distributed to the minor, ignoring the fact that the critical inquiry is not the value of the property that is subject to the reversionary interest but the value of the reversionary interest itself. In other words, defendant’s computation tells us only the amoimt of the trust subject to the trustee’s discretion and does not tell us the value of the probability that this discretion will be exercised.

And it is the probability that the plaintiff’s support obligation will be met from the trust funds that is defined as the reversionary interest. See note .4. Defendant’s contention is analogous, to valuing a reversion after a life estate by 'assuming that the life tenant will die immediately rather than at the end of his actuarial life expectancy. Such a computation would only show the greatest amount that could revert to the grantor and not the probable sum that would remain at the expiration of the life estate.

In short, what must be valued here is not the amount which the corporate trustee could distribute immediately if it were of a mind to do so, but the probability as of the dates the transfers to the trusts were made that the corporate trustee would exercise its discretion, during plaintiff’s lifetime, to make payments to plaintiff’s children in discharge of plaintiff’s legal support obligation to them. Viewed in this perspective, it is apparent from the record that the probability that the corporate trustee would exercise this discretionary power was factually so- remote as to be negligible.

It is quite true that the trust instrument gave the corporate trustee absolute discretion to distribute principal or income to the plaintiff’s children for their support, but this discretionary power not only may not be abused (see Scott on Trusts § 18V),-it must be considered in the context of applicable State law. See e.g., Helvering v. Stuart, 317 U.S. 154, 161-66 (1942).

The rule in Connecticut regarding discretionary trusts is that the trustee, in determining whether to expend trust funds for the beneficiary’s support, is entitled to take into consideration any other means of support available to the beneficiary. City of Bridgeport v. Reilly, 133 Conn. 31, 47 A. 2d 865 (1946); Auchinloss v. City Bank Farmers Trust Co., 136 Conn. 266, 70 A. 2d 105 (1949). This, it would seem clear, is what the corporate trustee as a prudent fiduciary would do in the present situation, especially since one of its primary obligations is to conserve the trust property.

See Scott, of. cit. sufra, §§ 174,176. In thus taking into account the other means of support available to plaintiff’s children, it would be highly unlikely that the trustee would ever distribute trust funds to them in discharge of plaintiff’s legal obligation of support.

For one thing, plaintiff-grantor’s adjusted gross income for each of the years when the transfers to the trusts were made was in excess of $400,000 (of which over $367,000 a year was investment income) so that the probability was obvious that he would be able to support from his own funds those beneficiaries of the trusts to whom he owed the legal obligation of support. Under these circumstances, the corporate trustee would not have to use the resources of the trusts for the purpose of discharging plaintiff’s obligation to support those beneficiaries.

Furthermore, during the years in question, the adjusted gross income of each of the three minor children ranged from some $11,000 to $17,000 a year and was rising each year. Added to this is the fact that when the transfers to the trusts were made, only a relatively short period remained before the children would reach their majority, at which time plaintiff’s support obligation would come to an end for all practical purposes.

Moreover, the rule in Connecticut, when considering the propriety of a trustee’s use or non-use of his discretionary support power, is to measure the trustee’s action by looking to the grantor’s intention “in the light of any relevant circumstances.” Auchinncloss v. City Bank Farmers Trust Co., supra, 136 Conn. at 271, 70 A. 2d at 107; Stempel v. Middletown Trust Co., 127 Conn. 206, 220, 15 A. 2d 305, 311 (1940); Bridgeport-City Trust Co. v. Beach, 119 Conn. 131, 137-38, 174 Atl. 308, 311 (1934); City of Bridgeport v. Reilly, supra, 133 Conn. at 38-39, 47 A. 2d at 867-68; Hull v.

Holloway, 58 Conn. 210, 217 (1889). In the present case the plaintiff-grantor’s intention appears clear that the discretionary power was not to be used except in instances of necessity and that action by the corporate trustee contrary-to this intention would be unwarranted. In

Article Fourth of each trust the plaintiff-grantor states that he “wishes to impress upon the Corporate Trustee in the strongest possible manner, but without abridging the absolute discretion hereinbefore granted to it, that his wife’s interests and her comfort and well-being are the * * * [grantor’s] first consideration and that accordingly it is his strong desire that after his death, if she shall survive him,” the corporate trustee pay to or apply to her use as much of the income and principal “as it may deem necessary, taking into consideration her available receipts from other sources and all other circumstances, to enable her to maintain the standards of living which she shall have maintained during the * * * [grantor’s] life.” After his wife’s death, the same recommendations are made with respect to the named child-beneficiary “so that he may maintain the station in life that the * * * [grantor] maintained.” Such language indicates that the corporate trustee is to manage the trust funds so as to provide adequately for the plaintiff’s wife after his death.

Making unneeded distributions to minor children would be contrary to such purpose since it would serve to reduce the funds available for plaintiff’s wife — and for the children after the death of the parents. In addition, it seems obvious that an important reason for establishing the trusts — apart from plaintiff’s desire to provide for Ms wife and children — was to exclude the trust income from plaintiff’s Mgh tax bracket. However, any distribution by the corporate trustee which would satisfy plaintiff’s support obligation under Connecticut law would be taxable to plaintiff under

section 677 (b). This would deny the. income-shifting benefit as to such distributions that the creation of the trusts was meant to acMeve. In such circumstances and considering the financial resources of plaintiff and Ms cMldren, it would be most unlikely that the corporate .trustee would thwart this important objective by distributing trust funds to discharge plaintiff’s support obligations. In

summary, the possibility as of the dates the transfers to the trusts were made that the corporate trustee would exercise its discretionary power, during plaintiff’s lifetime, to make distributions to plaintiff’s cMldren for support purposes was factually so improbable as to be negligible. Accordingly, even if it be assumed that the plaintiff had a reversionary interest in these trusts, it is an interest whose value was not in excess of five per cent of the trust property. Since

section 170(b) (1) (

D) does not apply to such a rever-sionary interest, the general rule of

section 170(

a) of the Code controls and plaintiff is entitled to the claimed charitable contributions deductions for 1955, 1956 and 1957. FindiNGS of Fact 1. The plaintiffs, husband and wife, are citizens of the United States and reside in Simsbury, Connecticut. They filed joint income tax returns on a calendar-year basis for each of the years here in issue — 1955, 1956 and 1957 — with the District Director of Internal Revenue in Hartford, Connecticut, on or before the dates specified by law for filing such returns, and they paid the income taxes shown to be due thereon. 2. On November 25, 1955, Robert E.

Darling (hereafter referred to as plaintiff ) established six similar irrevocable trusts, two for the ultimate benefit of each of his three then minor children. One trust for the benefit of each child and that child’s spouse or issue is referred to as a “Family Trust’’; the other trust for the benefit of the child alone is referred, to as a “Child’s Trust.” . ' 3.

Each of the three “Family Trusts” dated November .25, 1955, is identical except for the name of the child, who is a beneficiary thereof, and each of the three “Child’s Trusts” dated November 25,1955, is identical except for the name, of the child who is a beneficiary thereof. 4. The names and birth dates of plaintiff’s three children are as follows: Robert E. Darling, Jr., May 31,1937 Elizabeth C. Darling, April 18,1940 Julia W. Darling, February 9,1943 5j.

Plaintiff and the Hartford National Bank and Trust Company (hereafter referred to as the “corporate trustee”) are named as trustees of each of the trusts dated November 25,1955, and as of the present date are still serving as trustees for each of these trusts. 6.

All of the trusts dated November 25, 1955, were to continue until the death of the survivor of plaintiff’s wife and the child-beneficiary, and, upon the death of the survivor, the principal was to be paid over as the child-beneficiary shall appoint under a limited testamentary power of appointment, or, in default of appointment, to a designated class of remaindermen. 7. Each of the six trusts dated November 25, 1955, is charged with an obligation to pay to qualified charitable donees, within a 44-year period from the date of the trust, a sum which on that date had a present value of $11,000.

Plaintiff was to select the qualified charitable donees and to determine the amounts to be paid to them. The charitable charge could be paid from the income of the trust or, in the discretion of the corporate trustee, from the principal of the trust. No distributions of income or principal could be made to any beneficiary (other than a qualified charitable donee) if the funds of the trust would thereby be reduced to an amount less than 150 per cent of the then unsatisfied charitable charge. 8.

Each trust instrument dated, November 25, 1955, provided that plaintiff may at 'any time increase the charitable charge upon the trust by making an addition to the principal of the trust equal to at least 150 per cent of the increase. 9. (

a) Section C of

Article Sixth in each of the trusts provides: The Corporate Trustee [the Hartford Bank] may, from time to time, in its absolute discretion, (1) apply any or all income (whether current or accumulated) and principal held by the Trustees pursuant to this Article, or in a separate trust for a minor under

Article FIFTH, to the use of such minor for his care, comfort, education and welfare, or cost of maintenance of any residence, seasonal or otherwise, where such minor spends, or is about to spend, any time, or of the rent, taxes, repairs, operating and occupational costs and other expenses thereof, whether or not such minor shall be at such residence or away from it, including, but not limiting, such absences at school, or on vacation or travel; or (2) pay any or all thereof to the parent, guardian of the person or of any of-the property of such minor, or other person having the care, custody or control of such minor, for application generally to his use, or directly to such minor as an allowance or for personal or living expenses. (

b) Section C of

Article Fourth in each of the trusts provides: The Settlor wishes to impress upon the Corporate Trustee in the strongest possible manner, but without abridging the absolute discretion hereinbefore granted to it, that his Wife’s interests and her comfort and well-being are the Settlor’s first consideration, and that accordingly it is his strong desire that after his death, if she shall survive him, the Corporate Trustee allocate to her and pay to her, or apply to her use, from the initial trust, as much of such income, whether current or accumulated, up to the whole thereof, and as much of the principal as it may deem necessary, taking into consideration her available receipts from other sources, and all other circumstances, to enable her to maintain the standards of living which she shall have maintained during the Settlor’s life.

It is entirely possible, however, that the Settlor’s Wife may not require any of the income of this trust, and it is tor this reason that the Trustees have been granted power to divide the income and principal of the initial trust among a class of which she and others are members.

After the death of said wife, the interests, comfort and well-being of * * * [the specified child-beneficiary] are the Settlor’s first consideration,. and the Settlor makes the same recommendations with respect to * * * [the specified child-beneficiary’s] interests, comfort and well-being as heretofore made with respect to the Settlor’s Wife, during her lifetime so that * * * [the child beneficiary] may maintain the station in life that the Settlor maintained. 10. To five of the six trusts created on November 25,1955, plaintiff transferred 231 shares of common stock of E.

I. du Pont de Nemours & Co., and to the sixth he transfered 230 shares of such stock. The stock had a value of $228.94 per share as of the date of the transfer, and, as a result, the corpus of each of the five trusts as of November 25, 1955, was $52,885.14, and tlie corpus of tlie sixth trust as of that same date was $52,656.20. Each of the six trust instruments contained a charitable charge which on November 25, 1955, had a present value of $11,000. 11.

By instruments dated January 13, 1956, plaintiff transferred to each of five of the six trusts an additional 200 shares of said du Pont stock, and to the sixth he transferred 201 shares of such stock. The value of this stock as of January 13, 1956, was $226.75 per share, thereby increasing the corpus of five of the trusts by $45,350 and of the sixth by $45,576.75. At the time of these additional transfers, plaintiff increased the charitable charges on each trust by a sum which had a present value of $12,000.

These charitable charges were in addition to those imposed on the trusts at the time of their creation in November of 1955. 12. On December 24, 1956, plaintiff transferred 65 shares of du Pont stock, having a value of $191.03 per share, to each of the six trusts, thus increasing the corpus of each trust by $12,416.95. At the time of these additional transfers on December 24, 1956, plaintiff increased the charitable charge on each such trust by a sum which had a present value of $1,500.

These charitable charges were in addition to those imposed on the trusts at the time of their creation in November of 1955 and those imposed in January of 1956. 13. On December 19,1957, plaintiff established three additional irrevocable trusts, one for the ultimate benefit of each of his three then minor children and his family. Plaintiff himself and the Hartford National Bank and Trust Company were again named as trustees of each of these trusts and as of the present date are still serving in that capacity.

Each of the December 19,1957, trusts is identical except for the name of the child who is the beneficiary thereof. The terms and provisions of these instruments are generally the same as those in the “Family Trusts” of November 25,1955. 14. Plaintiff transferred to each of the three 1957 trusts 650 shares of du Pont stock having a value of $176.00 per share at that time; thus, the corpus of each of the three 1957 trusts was $114,400. Each of these trusts contained a charitable charge which on December 19,1957, had a present value of $27,500. 15.(

a) Plaintiff’s earned income, the investment income of himself and his wife and their adjusted gross income, as reflected on their joint income tax returns filed for the years 1955 through 1959, inclusive, were as follows: (

b) Plaintiff’s investment income, as reflected in the joint income tax returns filed for the years 1955 through 1959, inclusive, was, as follows: 1955_:_$370,638.23 1956_'367,630.16 1957- 387,042. 56 1958_ 395,140.47 1959- 406, 792. 63 16.The adjusted gross incomes of Robert E. Darling, Jr., Elizabeth C. Darling and Julia W. Darling, as reflected on their respective income tax returns filed for each of the years 1955-1959, inclusive, were as follows: 17. All the net income of each of the nine trusts has been applied to reduce the charitable charges contained in the trust instruments.

No payments have been made from any of said nine trusts to or for the benefit of any member of plaintiff’s family. 18. In their joint income tax returns for the calendar years 1955, 1956 and 1957, the plaintiffs claimed charitable contributions deductions under

section 170 of the Internal Revenue Code of 1954 in respect of the charitable charges imposed on the 1955 and 1957 trusts, determined as follows: Deduction Claimed 1955: Six trusts established, each with a charitable charge of $11,000_._$66,000 1956: Charitable charges on each of the six 1955 trusts increased by $13,500_ 81,000 1957: Three trusts established, each with a charitable charge of $27,500- 82,500 19.

On the audit of the plaintiffs’ returns for 1955 and 1956, questions were raised by the Revenue Agent as to the tax consequences of the establishment of the six 1955 trusts and the subsequent transfers to said trusts in 1956. On or about August 12,1958, the District Director in Hartford referred these questions to the National Office of the Internal Revenue Service in Washington, D.C., for technical advice. 20.

Thereafter, the Director of the Tax Rulings Division of the National Office forwarded a ruling dated March 21, 1961, to the District Director in Hartford determining that the amounts of the charitable charges claimed as deductions by the plaintiffs on their tax returns for 1955 and 1956 were not deductible under

section 170 of the Code because plaintiffs had a reversionary interest in the principal and income of the trusts within the meaning of

section 170(b) (1) (D). 21. The District Director forwarded a 80-day letter to the plaintiffs, dated April 6, 1962, attached to which was the report of the Revenue Agent setting forth proposed adjustments to plaintiffs’ income taxes for the years 1955,1956 and 1957. The plaintiffs filed a protest in reply to the 30-day letter, contesting the disallowance of said charitable contributions deductions, and a conference was held before the Appellate Division of the Regional Commissioner’s office in New Haven, Connecticut.

No agreement having been reached, the Commissioner of Internal Revenue forwarded to plaintiffs a statutory notice of deficiency (90-day letter), dated October 31, 1962, determining deficiencies in income tax for the years 1955,1956 and 1957 on the ground that the deductions were “not allowable as charitable deductions within the purview of

section 170 of the Internal Revenue Code of 1954.” 22. On or about November 15, 1962, the plaintiffs filed a Waiver of Restrictions on Assessment and Collections (Form 870) with respect to the deficiencies proposed in said statutory-notice of deficiency and informed the Appellate Division by a letter dated on said date that they intended to pay the deficiencies and sue for a refund. 23.

On December 27, 1962, the plaintiffs mailed to-the District Director checks in payment of the deficiencies and assessed interest in the following amounts: On March 15, 1968, the plaintiffs filed with the District Director in Hartford, Connecticut, claims for refund of income taxes and interest for the years 1955, 1956 and 1957 in the amounts of the total payments set forth above. ’ The refund claims for 1955, 1956 and 1957 were based solely on the charitable deductions issue involved in this suit, but the dollar amounts sought in those refund claims included some portions of deficiency taxes and assessed interest attributable to other adjustments which are not in dispute. 24.On October 7, 1963, the District Director forwarded to the plaintiffs by certified mail statutory notices dated on said date that each of the claims for refund for the years 1955, 1956 and 1957 had been disallowed in full.

CONCLUSION or Law On the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiffs are entitled to recover and judgment is entered to that effect. Computation of the amount of recovery will be determined pursuant to Rule 47(c). In accordance with the opinion of the court, a memorandum report of the commissioner and a stipulation of the parties, it was ordered on April 21,1967, that judgment for the plaintiffs be entered for $263,558.37.

The opinion, findings of fact, and recommended conclusion of law are submitted under the order of reference and Rule 57(a). Sec. 170. Charitable, etc., Contributions and Gifts. (

a) Allowance of deduction. — *

(1) General rule. — There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. * * * ♦ * * * * (

b) Limitations.—

(1) Individuals.— * * * * * # * # (

D) Denial of deduction in case of certain transfers in trust.— No deduction shall be allowed under this

section for the value of any interest in property transferred after March 9, 1954, to a trust if— (

i) the grantor has a reversionary interest in the corpus or income of that portion of the trust with respect to which a deduction would (but for this subparagraph) be allowable under this section; and (ii) at the time of the transfer the value of such reversionary interest exceeds 5 percent of the value of the property constituting such portion of the trust. For purposes of this subparagraph, a power exercisable by the grantor or a nonadverse party (within the meaning of

section 672(b)), or both, to revest in the grantor property or income therefrom shall be treated as a reversionary interest. Virginia K. Darling is a party to this suit by virtue of filing joint federal income tax returns with her husband. A contribution to a trust for the use of a qualified charitable organization is deductible by the grantor in the year the contribution is made, even though the charity may not under the terms of the trust receive the contribution until a later date. Bowman, 16 B.T.A. 1157 (1929); Dana, 18 T.C. 451 (1952).

Section 1.170-2 of the Income Tax Regulations (1954 Code) provides in part: (

d) Denial of deduction in ease of certain transfers in trust —

(1) Reversionary interest in grantor. No charitable deduction will be allowed for the value of any interest in property transferred to a trust after March 9, 1954, if the grantor at the time of the transfer has a reversionary interest in the corpus or income andi the value of such reversionary interest exceeds 5 percent of the total value on which the charitable deduction would', but for

section 170(b) (1) (I)), be determined. For purposes of this paragraph, the term “reversionary interest" meam a possibility that after the possession or enjoyment of property or its income has been obtained by a charitable donee, the property or its income may revest in the grantor or his estate, or may be subject to a power exercisable by the grantor or a nonadverse party (within the meaning of

section 672(b)), or both, to revest in, or return to or for the benefit of, the grantor or his estate the property or income therefrom. * * * [Emphasis supplied.] The ruling was subsequently published as Rev. Rul. 61-223, 1961-2 CB 125. More particularly, tlie "loophole” to which reference was made stemmed from the fact that under existing law an individual could transfer property in trust for a period of up to ten years without being taxedi on the trust Income and could also obtain a charitable deduction for the present value of an assigned Income interest, if transferred to a charitable organization. See Treas.

Reg. Ill §§ 28.22(a) — 21, 29.23(o)-l; Rev. Rul. 194, 1953-2 CB 12». The “loophole” was made more apparent by the proposal to add

section 673(

b) to the 1954 Code to allow the grantor of a trust whose income was irrevocably payable for at least two years to specific charities to exclude such income from his tax during that period even if he retained a reversionary interest in the trust at the end of that period. Although the income was not taxable to the grantor, he would nevertheless be entitled to a charitable deduction equal to the present value of the income placed in trust.

As pointed out in the minority report of the House Ways and Means Committee, this would actually permit the high-bracket taxpayer to make money by giving it away: “For example, [the minority stated) if the taxpayer’s highest tax rate is 90 percent and he owns property producing a yearly income of $5,000, over 2 years he will have $10,000 in income, pay $9,000 in taxes, and retain $1,000 after taxes. However, if the taxpayer desires to increase his retained income from the property 800 percent, he need only make a gift of the 2-year income in trust for a charity.

The charitable deduction of approximately $10,000 to which he thereby becomes entitled will reduce the taxes he would otherwise pay by $9,000. Thus, by giving up, through the charitable gift, the $1,000 which he would have retained after taxes, he will receive in exchange a $9,000 reduction in taxes. The result is an increase of $8,000 in his income after taxes (the savings in taxes of $9,000 less the net gift, after taxes, of $1,000 of income).” H. Rept. No. 1337, 83d Cong., 2d sess., pp. 1310-11 (1954) (minority views).

See also Rea, Changes in the Internal Revenue Code of 1954 Affecting Charitable Organizations, 27 Rocky Mt. L. Rev. 270, 274-75 (1955) ; Lowndes, Tax Advantages of Charitable Gifts, 46 Va. L. Rev. 394, 414-16 (1960). It is to be noted, though, that the term “reversionary interest” is not new to the tax law and is used in other sections — e.g., sections 673 and 2037 — of the 1954 Code. In Connecticut where plaintiff resides “it shall be the duty of the husband to support his family and his property when found shall be first applied to satisfy [this liability].” ¡Conn. Gen. Stat. § 46-10 (1958). See also State v.

Moran, 99 Conn. 115, 119, 121 Atl. 277, 279 (1923); State v. Kelly, 100 Conn. 727, 730, 125 Atl. 95, 95-96 (1924); Zybura v. Zybura, 142 Conn. 553, 557, 115 A. 2d 452, 454 (1955). Defendant points out, for example, that under one of the trusts created in November 1955 for a minor child, the corporate trustee received a corpus with a value of $52,885.14, subject to a charitable charge of $11,000.

It notes that even though the trust provisions prohibited any distribution which would reduce the fund to less than 150 per cent of the unsatisfied charitable charge (i.e., $16,500), there would still be left $36,385.14 that the corporate trustee could distribute to the minor — an amount which, defendant emphasizes, far exceeds 5 per cent of the $52,885.14 transferred.

Since 1949 the estate tax provisions of the Code have likewise contained a five per cent rule for valuing reversionary Interests so that property previously transferred by a decedent is includible in his gross estate if he still had at the time of his death a reversionary interest in the property exceeding five per cent of its value. See

section 811(c)(2) of the 1939 Code, now

section 2037 of the 1954 Code. The Committee reports on

section 2037 make dear that the five per cent reversionary requirement must be determined on the basis of probability, i.e., that the decedent must have had “prior to his death * * * 1 chance in 20 that the property would be returned to him." H. Rep. No. 1337, 83d Cong., 2d Sess. (1954) (3 U.S. Code Cong. & Adm. News (1954) p. 4117); S. Rep. No. 1622, 83d Cong., 2d Sess. (1954) (3 U.S. Code Cong. & Adm. News (1954) p. 4756).

Tie father’s support obligation to his children requires him to furnish them “with such necessaries as the law deems essential to [ their] health and comfort, including suitable clothing, lodging, food and medical attendance.” State v. Moran, 99 Conn. 115, 119-20, 121 Atl. 277, 279 (1923). The general rule in Connecticut requires that other resources of the beneficiary, both principal and income, must be substantially exhausted before any invasion of the corpus of a trust is authorized. Guaranty Trust Co. v. New York City Cancer Comm., 145 Conn., 542, 144 A. 2d 535 (1958).

For example, when the initial trusts were created in November 1955, plaintiff’s minor son was 18%. years old, and his two daughters aged 15% years and 12% years, respectively: When the December 1957 trusts were created, less than six months remained for the son to reach his majority, while 3% and 6% years, respectively] remained for the daughters to reach their majority. In Connecticut a father has the duty to support an adult child only if such child is a pauper and unable to support himself' and the father is able to support the child. Conn. Gen., Stat. § 17-320 (1958); Zdanowich v. Sherwood, 19 Conn.

Supp. 89, 93, 110 A. 2d 290, 293 (Super. Ct. 1954). Such an occur rence would seem so remote in this ease as to require no consideration. under

section 677(

b) of the 1954 Code, trust income is not taxable to the grantor merely because such income may in the trustee’s discretion be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain. To the extent, howevir, that the trust income is actually applied or distributed for that purpose, thi

section requires that it be included in the grantor’s gross income. The problem presented here — whether there is a factual likelihood that a discretionary power will be exercised — is not novel. For example, the question frequently arises under the estate tax as to whether a bequest of a remainder to charity, after a prior estate to a non-eharitable beneficiary, is deductible from the gross estate as a charitable gift, which question turns on whether the charitable contribution had an ascertainable value at the time of the testator’s death. In Millard v. Humphrey, 8 F. Supp. 784, 786-88 (W.D.

N.Y. 1934), aff’d 79 F. 2d 167 (2d Cir. 1935), decedent left a trust, the income of which was to be paid to his wife for life and the remainder was to be paid to charity. The wife was given the right to invade the principal of the trust for her support.

When a charitable deduction for estate tax purposes for the remainder was claimed, the government denied the deduction on the ground that the remainder had no ascertainable value since the wife before her death could consume the entire principal of the trust, upon considering the wife’s financial position and her mode of living, the court -held that there was no reasonable possibility that the corpus would ever be invaded and, therefore, allowed a deduction for the remainder interest on the assumption that the discretionary support power in the wife would never be exercised. See also e.g., Ithaca Trust Co. v.

United States, 279 U.S. 151 (1929); Commissioner v. Bank of America National Trust & Savings Assn., 133 F. 2d 753, 753-55 (9th Cir. 1943); Lincoln Rochester Trust Co. v. McGowan, 217 F. 2d 287, 292 (2d Cir. 1954); Edwin E. Jack, 6 T.C. 241, 245 (1946). See also Treas. Reg. § 20.2055-2 (b) (1958).

In view of this conclusion, It Is unnecessary to pass upon plaintiff’s alternative contentions (1) that he did not have a reversionary interest in those portions of each trust which were safeguarded for the charitable .beneficiaries, and (ii) that even if he had a reversionary interest, the interest is not susceptible of valuation and, therefore, under the analogy of

section 2037 of the 1954 Code dealing with the estate tax, it had as a matter of law a zero value. See Lowndes & Kramer, Federal Estate & Gift Taxes (2d ed.) § 7.7, p. 114. Virginia K. Darling is a party to this suit by virtue of filing joint federal income tax returns with her husband.