## Facts

- In 1938, Barbara M. Lockard created an irrevocable trust naming herself and another as cotrustees; all net income was payable to her husband, Derwood W. Lockard, for six years, with principal reverting to her on April 1, 1944 (or earlier on his death).
- Lockard filed 1938 and 1939 gift-tax returns treating the transfers as taxable gifts and claimed portions of the $40,000 statutory specific exemption; those exemptions were allowed administratively.
- On December 31, 1941, Lockard restructured the arrangement by resigning as cotrustee and transferring her reversionary interest so the trust would continue after April 1, 1944 for Derwood’s life.
- Under the 1941 terms, beginning April 1, 1944 the trustee had to pay all income to Derwood annually for life and could, in the trustee’s sole discretion, distribute up to $3,000 of principal per year for Derwood’s comfortable maintenance and support; on Derwood’s death, principal was to go to Lockard if living, otherwise to her estate.
- Lockard’s 1941 gift-tax return reported a taxable gift, valued the 1941 transfer at $55,000, and claimed the full $40,000 specific exemption.
- The Commissioner (1) disallowed $22,595.95 of the claimed 1941 exemption as already used and allowed in 1938–1939, and (2) valued the 1941 gift at $99,459.37, determining a 1941 gift-tax deficiency of $5,517.39.
- The Tax Court sustained the deficiency; Lockard sought review in the First Circuit.

## Issues

1. Whether the 1938–1939 transfers creating an irrevocable right to trust income for a fixed term were completed taxable gifts in the year of transfer, even if the settlor could remain taxable on the income for income-tax purposes.
2. Whether exemption amounts claimed and allowed in 1938–1939 properly reduced the donor’s remaining $40,000 specific exemption for 1941.
3. How to value, for gift-tax purposes, a 1941 transfer granting (after a deferred start date) a life income interest plus a trustee’s discretionary power to distribute up to $3,000 of principal annually for the beneficiary’s support.

## Decision

- The First Circuit affirmed the Tax Court’s determination of a 1941 gift-tax deficiency.
- The court held the 1938 and 1939 transfers were taxable gifts of income interests; therefore, the specific exemption amounts allowed in those years properly reduced the remaining exemption available in 1941.
- The court upheld treating the 1941 restructuring as a present taxable gift with substantial value, not limited to the deferred life-income interest alone, and found no error in the Tax Court’s acceptance of the Commissioner’s valuation approach.

## Legal Principles

- An irrevocable transfer of a beneficiary’s right to receive trust income for a definite term constitutes a completed taxable gift when the trust is funded, regardless of whether the donor may be treated as owner of the trust income for income-tax purposes.
- A donor’s specific gift-tax exemption is reduced by amounts previously claimed and allowed, provided the earlier transfers were in fact taxable gifts; a donor cannot later negate those gifts to restore exemption.
- A transfer granting a life income interest together with a discretionary right to principal distributions for the beneficiary’s maintenance and support is valued as a present gift of the combined rights when created; the possibility that principal may never be invaded does not limit the taxable gift to the income interest alone.

## Conclusion

The court upheld a gift-tax deficiency by treating short-term irrevocable income interests as completed gifts that consume the specific exemption when allowed, and by approving valuation of a deferred life-income interest plus discretionary principal-invasion rights as a present taxable gift.


Lockard v. Commissioner, 166 F.2d 409 (1st Cir. 1948)