Asher v. Cory

Opinion

GRODIN, J. The question presented by this appeal is whether the transfer of assets to a trustee for a specific term, under directions to pay [522]net income to designated beneficiaries, and with discretion to distribute up to one-half of the corpus to the beneficiaries for stated purposes, constitutes a “transfer by gift of ... property” within the meaning of Revenue and Taxation Code section 15201. The trial court held that it does, the taxpayer has appealed, we affirm.

Factual and Procedural Background

The facts of the case are not in dispute. On July 17, 1978, Charlene Asher, as settlor, transferred to her husband, Richard B. Asher, and her two adult children, Anne Leslie Asher and Brian Lee Asher, as co-trustees, certain securities with a market value of $250,000, under a trust agreement directing the trustees to pay the net income from the trust property in periodic installments to Anne and Brian, the income beneficiaries. The trust was to terminate not later than 10 years and 1 day from the date of the transfer, at which time the remaining trust property would revert to the settlor, Charlene. In these respects, the agreement qualified as a lawful means of diverting income from trust property to the income beneficiaries under the so-called “Clifford” principles of both federal and state income tax laws. (See generally, Int. Rev. Code, §§ 671-677; Rev. & Tax. Code, §§ 17781-17791.)

In addition, the trust agreement provided as follows: “At any time during the term of this Trust the Trustees, at their sole discretion, acting in that capacity, shall have the power to distribute up to one-half of the trust principal to or for the benefit of each of the Income Beneficiaries for his or her support, maintenance, health, and education.”

The Controller, claiming that the transfer of property to the trust constituted a taxable gift to the income beneficiaries, sent Charlene a notice of deficiency to that effect. Charlene filed suit challenging the deficiency determination, the trial court sustained the Controller’s demurrer without leave to amend, and it is from the consequent judgment of dismissal that Charlene appeals.

Discussion

Relevant provisions of the Revenue and Taxation Code impose a tax upon “every transfer by gift of any property by an individual” (§ 15201), define “property” as “any real or personal property or interest therein ...”(§ 15103), and define “transfer” or “gift” as including “the passage by gift of any property, or any interest therein_or income