## Facts

- George L. Bignell’s will created a testamentary trust for his daughter, Ruth B. Regester.
- The trust required the trustee to pay net income to Ruth at least quarterly for her life, with discretionary principal distributions for her support if needed.
- Ruth held a special (nongeneral) power of appointment over trust principal during life and at death, exercisable only in favor of her son (Charles Regester) and/or his issue; the remainder could not pass to Ruth’s estate or creditors.
- Before receiving trust distributions, Ruth executed a written instrument directing distribution of the entire trust principal to Charles.
- Distributing all principal eliminated the corpus and effectively terminated Ruth’s future right to income from the trust.
- The value of Ruth’s relinquished life income interest was not reported on gift tax returns or on her estate tax return.
- The IRS determined a gift tax deficiency, treating Ruth’s action as a taxable gift of her life income interest under I.R.C. § 2511 and Treas. Reg. § 25.2514-1(b)(2).

## Issues

1. Whether exercising a special (nongeneral) power of appointment to transfer the entire trust corpus to another beneficiary, thereby terminating the powerholder’s own life income interest, constitutes a taxable gift of that life interest under I.R.C. § 2511.
2. Whether Treas. Reg. § 25.2514-1(b)(2) validly treats the relinquishment of a beneficial interest occurring through exercise of a special power as a taxable transfer.

## Decision

- The Tax Court sustained the Commissioner’s determination of a gift tax deficiency.
- Ruth’s exercise of her special power to appoint the entire corpus to Charles constituted a taxable gift of the value of her surrendered life income interest.
- Treas. Reg. § 25.2514-1(b)(2) was upheld as a reasonable interpretation of the gift tax statute as applied to these facts.

## Legal Principles

- I.R.C. § 2511 imposes gift tax on gratuitous transfers of property interests, direct or indirect, where the transferor parts with dominion and control over economic value.
- A life income interest in a trust is a property interest with determinable value; intentionally extinguishing it for another’s benefit can be a taxable gift.
- Under Treas. Reg. § 25.2514-1(b)(2), exercise of a special (nongeneral) power that affects the holder’s own beneficial interest may be treated as a transfer subject to gift tax to the extent of the value shifted.
- Prior authority treating exercise of special powers as non-taxable does not control where the powerholder’s own beneficial interest (here, a life estate) is deliberately terminated in connection with the appointment.

## Conclusion

By appointing all trust principal to her son using a special power of appointment, Ruth necessarily surrendered her own valuable life income interest and conferred that economic benefit on Charles; the Tax Court held this surrender was a taxable gift under § 2511 and upheld the Treasury regulation treating the transaction as a taxable transfer.


Estate of Regester v. Comm’r, 83 T.C. 1 (1984)