This section contains the nature of the case and procedural background.

Settlor created a trust for the benefit of her two children and five grandchildren. She intended to transfer most of the trust assets into the trust during her lifetime. Under the terms of the trust, at the time a transfer was made, any of the beneficiaries had the right to withdraw an amount from the trust corpus equal to the Federal Gift Tax Exclusion ($10,000). This right was to exist for 15 days following the transfer. During her life, Settlor made two separate transfers of property into the trust, each worth $70,000, during different taxable years. She did not report these transfers as taxable gifts. Instead, she claimed exclusions of $10,000 for each of her children and grandchildren, totaling the full amount of the transfers. The commissioner (D) allowed the exclusions made with respect to Settlor's two children, who had a present interest in the trust income but disallowed those claimed for the grandchildren.

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