United States v. Pelzer

In 1932, Arthur Pelzer (plaintiff) set up and funded a trust for his eight currently living grandchildren and any after-born grandchildren. Under the trust’s terms, the trust would accumulate income and not make any distributions for the first 10 years. After 10 years, each living grandchild over the age of 21 would receive an annual distribution from the trust’s income. Pelzer transferred additional money into the trust in 1933, 1934, and 1935. The federal government (defendant) decided that the trust was the sole recipient of these funding gifts. At that time, federal law limited a person’s annual gift-tax exclusions to a maximum of $5,000 in present property interests per recipient. Therefore, Pelzer was allowed to exclude only one recipient’s worth of gifts, $5,000, from each year’s transfers before calculating his gift-tax liability. Pelzer petitioned the United States Court of Claims for a determination that, as trust beneficiaries, each living grandchild was a separate recipient of the trust-funding gifts. This would mean that Pelzer was entitled to claim eight recipient exclusions, for a total exclusion of $40,000 each year. In response, the government argued that either (1) the trust was the sole recipient of a present property interest for a single $5,000 exclusion each year or (2) the trust’s beneficiaries were separate recipients of future property interests that were not entitled to any exclusions. The Court of Claims agreed with Pelzer’s position and ruled that Pelzer did not owe any gift tax on the first $40,000 of each year’s transfers into the trust. The United States Supreme Court agreed to review the issue.