Opinion
Docket No. 8929.
1947-04-30
WILLIAM P. ANDERSON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Albert L. Russell, Esq., and Leonard A. Weakley, Esq., for the petitioner. John O. Durkan, Esq., for the respondent.
Petitioner, in 1919, created a trust, with a corporate trustee. The trust instrument provided that $800 a month be paid by the trustee out of net income to the wife of petitioner, and that any net income in excess of that amount be paid to petitioner. Upon the death of either petitioner or his wife, the net income and corpus became payable to the survivor. Petitioner retained power during his lifetime to terminate trust and have corpus and accumulated income distributed to his wife, and to direct trustee to sell or exchange any part of corpus and substitute other property. Taxpayer's wife mingled her independent income, the trust income, and an additional contribution from her husband in a single bank account from which she paid all family expenses, together with her own personal expenses. Held, the trust income is not taxable to the trustor under section 22(a), 166, or 167, I.R.C. Albert L. Russell, Esq., and Leonard A. Weakley, Esq., for the petitioner. John O. Durkan, Esq., for the respondent.
The respondent determined deficiencies in the income tax of petitioner in the amount of $4,390.45 for the year 1940 and $4,645.07 for the year 1941.
The sole question is whether the entire net income of a trust created by petitioner in 1919 constituted income taxable to petitioner under the provisions of section 22(a), 166, or 167 of the Internal Revenue Code.
FINDINGS OF FACT.
Petitioner is a resident of Cincinnati, Ohio. His income tax returns for the years 1940 and 1941 were filed with the collector of internal revenue for the first district of Ohio.
At all times material herein Marguerite T. Anderson was the wife of petitioner. She was born on September 16, 1878, and the petitioner on September 5, 1874. They have one adopted child, who was born on February 1, 1916, and adopted by them about the middle of March of the same year. He is now married.
On November 10, 1919, petitioner executed a declaration of trust, in which the Bankers Trust Co. of New York City was named trustee. The trust was duly accepted by the trustee, and petitioner conveyed to it certain securities of the par value of $153,575, L402, yen 2580. The trust instrument provided that the sum of $800 was to be paid out of net income by the trustee each month to the wife of petitioner; that any net income in excess of that monthly payment was to be paid to petitioner; and that upon the death of petitioner or his wife, the entire net income of the trust was to be paid to the survivor. The following provision was made for the possible termination of the trust during the life of petitioner and his wife:
At the written request of the donor, or, on his death, at the written request of Marguerite T. Anderson, the trustee shall transfer and distribute the principal of the trust estate then in its hands, together with all accumulations of income, if any, to said Marguerite T. Anderson.
On the death of either the donor of the beneficiary the survivor is to receive the net income of the trust and the corpus thereof, upon written request therefor. Should both the donor and the beneficiary die before final distribution of the trust, then the trust corpus and accumulated income shall return to the executors of the donor, provided the beneficiary does not survive the donor by six months, in which event the corpus and the accumulated income shall be paid to the executors of the beneficiary.
The trust instrument contained the following paragraphs:
1. Said Trustee, at the written request of the donor, during his lifetime, and in its discretion, after his death, shall continue to hold, or shall vary, alter, transpose, sell and transfer all or any real or personal property held by it under said trust, to substitute therefor other investments which the donor, or after his death the said Trustee, may regard as suitable for said trust, when and so often as it shall be deemed desirable or convenient so to do, and without regard to any statutory limitations prescribed for said trust investments. And said trustee shall stand possessed of all such new or other securities and property upon the same trusts as those herein declared as to the securities mentioned in said Exhibit A, and assigned and transferred as aforesaid to said trustee.
5. The donor reserves the right to add to or reduce the principal of this trust, and the said trustee shall transfer to the said donor, at his written request, such portion of said principal as he may designate, provided the value of the trust estate remaining in its hands at the time of said transfer, shall exceed Two Hundred Thousand Dollars ($200,000), as determined by its sale or bid price on that date, or as appraised by the said trustee in absence of such sale or bid price.
At no time before or after the creating of the trust did petitioner have any express verbal or written agreement with his wife that she was to pay all or any part of her household expenses or of her personal maintenance expenses out of the income she received from the trust, and he never expressly directed her as to the use which she was to make of the trust income received her her.
For the taxable year 1940 petitioner's wife received the following income:
+------------------------------------------------+ ¦Income from trust ¦$9,600.00¦ +--------------------------------------+---------¦ ¦Personal income from other investments¦8,606.80 ¦ +--------------------------------------+---------¦ ¦Contribution from petitioner ¦3,800.00 ¦ +--------------------------------------+---------¦ ¦Total ¦22,006.80¦ +------------------------------------------------+
For the year 1941 petitioner's wife received the following income:
+-------------------------------------------------------------------------+ ¦Income from trust ¦$9,600.00¦ +---------------------------------------------------------------+---------¦ ¦Income from private investments, less capital loss of $1,357.36¦7,790.34 ¦ +---------------------------------------------------------------+---------¦ ¦Contribution from petitioner ¦3,600.00 ¦ +---------------------------------------------------------------+---------¦ ¦Total ¦20,990.34¦ +-------------------------------------------------------------------------+
It was the practice of petitioner's wife to commingle all moneys received by her from various sources in a single fund, the bulk of which was kept on deposit with a bank in Cincinnati, Ohio, with occasional transfers of sums to a bank at Biddeford Pool, Maine, for summertime use. She made no effort to segregate any sums which she might receive from petitioner or from other sources. From the composite bank account which she maintained she withdrew sums for a variety of uses. These uses included gifts to charities and to relatives, investments, personal pleasure, luxuries over and above actual maintenance, and, in addition, personal maintenance and household expenses.
Petitioner knew that in 1940 $12,400 and in 1941 $11,390, being the sum of his wife's private income and his own personal contribution to her in addition to said income, were sufficient amounts to cover all of his wife's expenditures for personal and household needs. Aside from that, he knew nothing concerning the financial affairs of his wife or of her disposition of the trust income.
Petitioner has never served as an officer, director, or employee of the Bankers Trust Co., and, with but one minor exception, has never served as an officer, director, or employee of any corporation whose securities were included as a part of the corpus of the trust. The one exception is the Ferro Realty Co., a small amount of the stock of which was included in the trust corpus for a period of about one year, viz, 1925-1926.
During the calendar year 1940 the net income of the trust was $13,150.37, of which $9,600 was paid to petitioner's wife, as required by the provisions of the trust, and the balance was paid to petitioner. During the year 1941, the net income of the trust was $12,235.90, of which $9,600 was paid to petitioner's wife, and the balance to petitioner. For each of these years petitioner and his wife reported in separate income tax returns the respective portions of trust income received by each.
A considerable portion, if not all, of petitioner's wife's separate property from which she derived income was a gift from petitioner in 1931 and had been producing income consistently from that time to and through the taxable years.
During the year 1941 the trust realized a net long term capital gain in the sum of $157.67, all of which was added by the trustee to the principal of the trust and not distributed. The trustee reported this sum as income and paid tax thereon.
The total value of the assets of the trust as of December 31, 1940, was $157,563 and as of December 31, 1941, was $143,389.
The petitioner, under the terms of the declaration of trust, directed the trustee to vary, alter, transpose, sell, and transfer all the property held by said trust so that as of July 1943 the trust corpus contained none of the assets originally contributed by the petitioner to the trust.
The respondent determined that the entire net income of the trust for the years 1940 and 1941 should be attributed to petitioner and he adjusted the net income reported by petitioner in his return by adding thereto $9,600 for the year 1940, and $9,600, plus $157.67, capital gain for the year 1941.
OPINION.
HARLAN, Judge:
Respondent seeks to tax the income of the trust to petitioner under the provisions of sections 22(a), 166, and 167, of the Internal Revenue Code. In support of his contention that the income is taxable under section 22(a), he argues that the trust instrument did not establish a valid trust relationship and, if it did, the income is nevertheless taxable to petitioner under the rationale of Helvering v. Clifford, 309 U.S. 331.
We are not impressed with respondent's argument that a valid trust was not established. In this connection he stresses the provision in paragraph 1 of the trust instrument wherein the trustee, at the written request of petitioner during his lifetime, shall vary, alter, transpose, sell, and transfer the property held in trust, and substitute other investments which the petitioner may regard as suitable for the trust, and without regard to any statutory limitations prescribed for such trust investments. Respondent states that because of this provision ‘title was in the petitioner as he alone had the power to deal with the securities as he saw fit.‘ We do not agree with this statement. The rights and powers which petitioner, trustor, reserved in paragraph 1 to supervise, direct, and control investments and reinvestments of trust property are not unusual in trust instruments and do not render a trust, otherwise effective, nugatory. Central Trust Co. v. Watt, 38 N.E.(2d) 185; 139 Ohio 50; Cleveland Trust Co. v. White, 15 N.E.(2D) 627; 134 Ohio 1; Pinckney v. City Bank Farmers Trust Co., 249 App.Div. 375; 292 N.Y.S. 835; Van Cott v. Prentice, 140 N.Y. 45; 10 N.E. 257. They have been held to be consistent with a valid trust. Cushman v. Commissioner, 153 Fed. (2d) 510; Commissioner v. Donahue, 128 Fed.(2d) 739, affirming 44 B.T.A. 329; Ward Wheelock, 7 T.C. 98; Helvering v. Stuart, 317 U.S. 154. The same is true of the provision in paragraph 1 that investments may be made ‘without regard to any statutory limitations prescribed for said trust investments,‘ the obvious purpose of which is to permit the investment of trust funds in securities having a higher yield and a correspondingly higher risk that would be allowed by restrictive state statutes. All of the evidence convinces us that petitioner intended to and did create a valid trust by the instrument of November 10, 1919.
We next consider respondent's contention that the income of the trust is taxable to petitioner under the doctrine of Helvering v. Clifford, supra. In that case the Supreme Court held that ‘the benefits directly or indirectly retained blend so imperceptibly with the normal concepts of full ownership ‘ that the husband should be treated as the owner of the trust property and taxed with its income. The determination of whether a trustor retains such control as approximates the substance of ownership depends upon the facts of each particular case. An examination of the trust instrument discloses that petitioner retained the power during his lifetime to control investments. By reason of this retained control he could direct the trustee to hold or dispose of certain property, and substitute other property for that sold or otherwise transferred. He possessed a possibility of reverter in the event his wife predeceased him. He retained the right to receive any income in excess of $800 per month, and the right to withdraw, in the event the value of the corpus exceeded $200,000 any portion of the corpus representing such excess.
The above listed benefits retained by petitioner do not in our judgment measure up to ‘the normal concepts of full ownership.‘ To the extent that income of the trust in excess of $9,600 per annum was currently distributable to him, he reported it in his tax returns and paid the tax thereon. He was not entitled to withdraw any part of the trust corpus during the taxable years, because its value did not exceed $200,000. There was only a remote possibility that the property might revert to him upon the death of his wife. His wife, and not he, benefited chiefly from his retention of control of investments, as she was the principal beneficiary of the trust. Under such circumstances, it could hardly be said that he retained ‘so many of the attributes of ownership‘ that he should be treated as owner. DuPont v. Commissioner, 289 U.S. 685. Many features common to Clifford trusts, such as short term, grantor naming himself to be trustee, retention of power to vote stock included in trust corpus, retention of power to alter, amend, or revoke the trust, retention of power to direct the accumulation of income or the withholding of income from beneficiary, and an attempt by the grantor by means of the trust to relieve himself of the obligation to support his family, are lacking. Our conclusion is that the entire trust income is not taxable to petitioner under the rationale of Helvering v. Clifford, supra.
In support of his contention that the income of the trust is taxable to petitioner under the provisions of section 166 of the Internal Revenue Code,
respondent points to the powers reserved in paragraphs 1 and 5 of the trust instrument. He urges that the powers reserved in paragraph 1 are similar to those reserved by the grantor in Chandler v. Commissioner, 119 Fed.(2d) 623. wherein the grantor had the power to direct the trustee to sell trust securities to himself at his own price, and the court held that the income of the trust was taxable to him under the provisions of section 166. We do not agree. Under the provisions of paragraph 1 the power of petitioner to direct the trustee to ‘vary, alter, transpose, sell and transfer‘ any part of the trust property is coupled with the requirement that the trustee ‘substitute therefor other investments which the donor * * * may regard as suitable for said trust.‘ Thus the power retained by the grantor is by its very terms limited in its scope so that the property removed by sale or transfer must be replaced by similar property, and under the provisions of section 5 the trust corpus can not be reduced by any act of the grantor until the trust corpus exceeds $200,000 in value, and the trustee is to determine that value either by the market price of the securities or by his own appraisement. Thus, if petitioner were to replace valuable securities for less valuable or worthless ones, as the respondent indicates he could do, he would be reducing the value of the corpus of the trust. Unquestionably either the trustee or the beneficiary could prevent such an abuse of power by the petitioner, even though the trust instrument itself excuses the trustee from legal control.
SEC. 166. REVOCABLE TRUSTS.Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested—(1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or(2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, then the income of such part of the trust shall be included in computing the net income of the grantor.
In Carrier v. Carrier, 123 N.E. 135, the trustor, who was also one of the trustees, reserved the power to direct the investment of the trust funds, and provided that the trustor in so acting should not be limited by the ‘rules governing investments by executors or trustees and the trustee shall follow his directions with regard to investments without question or demurrer.‘ Judge Cardoza said of this release from legal control: ‘His discretion, however broad, did not relieve him from obedience to the great principles of equity which are the life of every trust.‘
Section 166 provides that where any part of the corpus is subject to being revested in the grantor, then the income of such part is taxable to him. The trust instrument clearly contemplates that no part of the corpus shall revest in petitioner unless the value of the corpus exceeds $200,000. The stipulation shows that at the institution of the trust and during both of the years involved in this proceeding the value of the corpus was well below that amount. Inasmuch as no part of the trust corpus could revest in the petitioner during the taxable years, no part of the trust income is taxable to him under section 166.
The Commissioner contends that this trust is taxable under section 167 of the code,
on the ground that the beneficiary was spending the income of the trust commingled with her own income and with an additional contribution made by the trustor to the trustee for the combined purpose of household maintenance, gifts, charitable donations, and the personal expenses of the beneficiary. He cites Helvering v. Stuart, 317 U.S. 154.
SEC. 167. INCOME FOR BENEFIT OF GRANTOR.(a) Where any part of the income of a trust—(1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or(2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or(3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(o), relating to the so-called ‘charitable contribution‘ deduction); then such part of the income of the trust shall be included in computing the net income of the grantor.(b) As used in this section, the term ‘in the discretion of the grantor ‘ means ‘in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question.‘
It is our opinion that the facts in this case are not comparable to those in the Stuart case and much more nearly approach those in the case of Henry A. B. Dunning, 36 B.T.A. 1222. In that case the beneficiary voluntarily spent some of the money received from the trust for the support of the family and some of the married adult children. This Court held that the fact that the beneficiary used some of the trust income for the support of her own children and family did not necessarily constitute such expenditures as being intended to relieve the trustor of his legal responsibilities, but that they were more in the nature of gifts from the beneficiary to the members of her own family. The Commissioner attempts to distinguish the Dunning case from the case at bar, with which it is almost on all-fours, by saying that in the case at bar there was a tacit agreement between Anderson and his wife that these trust funds were to be used for family expenses. Our findings show that there was no such express agreement. We are also unable to imply any such agreement from the evidence, which merely shows that the petitioner's wife did actually use her own income to help defray the family expenses with the knowledge of her husband.
The Commissioner cites section 7997 of the Ohio General Code, which reads as follows: ‘The husband must support himself, his wife and his minor children out of his property or by his labor. If he is unable to do so the wife must assist him so far as she is able,‘ as militating against such a use of the wife's personal means. We can see no provision in this statutory section that would prevent the wife from agreeing to use her own funds if she so desired. The statute merely provides a rule of law to control when there is a disagreement or when a claim is made by outside parties who have furnished necessaries to the family.
It is therefore our conclusion that the entire income of the trust for the taxable years is not taxable to petitioner, and that he correctly included in his returns as taxable to him the income he actually received from the trustee.
Reviewed by the Court.
Decision will be entered for the petitioner.