Opinion
Docket No. 3952.
1945-08-20
SYDNEY R. NEWMAN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Frederick E. Winkler, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
Petitioner's wife created two trusts, consisting of securities, each of which named petitioner as sole trustee. One trust was for the benefit of their daughter and the other for the benefit of their son. The trust income was payable to the beneficiary for life, and at the death of the beneficiary the trust was to be terminated and the residue paid over to petitioner. If petitioner predeceased the beneficiary, the remainder was to be paid over to such persons as petitioner might by will appoint, and in default thereof the remainder was payable to petitioner's distributees. In addition to broad powers of management and control over the trust estate vested in petitioner as trustee, petitioner had power to alter, amend, or revoke the trust at any time. Held, petitioner's power to alter or amend the trust and his control, dominion, and power of disposition over the trust income and trust estate are not sufficient to impute to him the substantive ownership thereof, and the income from the trust is not taxable to him under section 22(a) of the Internal Revenue Code. Frederick E. Winkler, Esq., for the petitioner. Thomas R. Charshee, Esq., for the respondent.
This proceeding involves a deficiency in income tax for the calendar year 1940 in the sum of $493.02. In addition to other adjustments not in dispute, respondent determined that the income of two trusts, totaling $830, of which petitioner was sole trustee, was taxable to him individually under section 22(a) of the Internal Revenue Code.
FINDINGS OF FACT.
Petitioner is an attorney practicing in New York City and resides at University Gardens, Great Neck, New York. His income tax return for 1940 was filed with the collector of internal revenue for the second district of New York. At all times hereinafter mentioned he was married to Lillian M. Newman, who resided with him. They are the parents of Janice and Robert Newman.
On or about June 28, 1940, Lillian M. Newman created two trusts, each of which named petitioner as sole trustee. One trust was for the benefit of her daughter, Janice R. Newman, and the other for the benefit of Robert W. Newman. At the time the children were minors. The terms of the trust instruments are identical and for convenience they will be referred to hereinafter in the singular. The corpus of the trust consisted of securities worth approximately $10,000, which for the purpose of convenience remained in the name of Lillian M. Newman on the corporation records. She received the dividends and paid them to petitioner, who deposited them in trust accounts. Under the terms of the trust instrument petitioner could keep the trust securities in his own name or in the name of a nominee. The securities which constituted the corpus of the trust were endorsed in blank by Lillian M. Newman, but they had not been transferred on the books of the companies, in order to facilitate their sale or other disposition. Under the trust instrument petitioner, as trustee, was given broad powers of management and control over the trust estate. In addition the trust included the following provisions:
THIRD: Subject to the power of the Trustee solely at his option from time to time to use all or any part of the income and principal of the trust fund to pay any taxes, assessments, costs, charges, or expenses incurred in the receipt, collection, care, administration, protection or distribution of the trust fund or income thereof, the Trustee shall hold, manage, invest and reinvest the said property with power to sell any investments, and to reinvest the proceeds thereof, and shall collect and receive the issues, interest and income thereof and pay over the net income and principal as follows:
(a) To pay the income annually to Robert W. Newman, son of the Grantor, during his lifetime. Upon the death of said Robert W. Newman all the rest, residue and remainder of said fund shall be paid over to Sydney R. Newman, husband of the Grantor. If the said Sydney R. Newman shall not then be living, the rest, residue and remainder of said fund shall be paid over to such person or persons as the said Sydney R. Newman by his last will and testament may direct and appoint; upon the death of said Sydney R. Newman without having exercised such power of appointment to pay the rest, residue and remainder of said fund to his distributees.
TENTH: Said Sydney R. Newman shall have the power at any time during his life, by an instrument in writing delivered to the Trustee, to revoke this agreement, in whole or in part, or to alter or amend the same or to free any of the property held in trust from the terms of this trust, and upon receipt of such instrument in writing, the Trustee shall turn over to the Grantor any funds or property held by the Trustee hereunder as required by said written notice, and the receipt of the Grantor for such property shall be a full acquittance to the Trustee.
Petitioner opened a separate bank account for each trust and the income was deposited therein. No withdrawals have been made except to adjust a dividend payment and to purchase additional property for one of the trusts. Household expenses and the support and education of the beneficiaries have been paid by petitioner from his own funds.
OPINION.
DISNEY, Judge:
Respondent has determined a deficiency in petitioner's income tax by including in his income the income of certain trusts created for the benefit of his children. The only question is whether petitioner has such dominion over the income and the trust estate as to be deemed the real owner thereof, in which event the income would be taxable to him under the provisions of section 22(a) as construed by the United States Supreme Court in Helvering v. Clifford, 309 U.S. 331. Recently we had occasion to consider whether the income from this trust was taxable to petitioner's wife, the grantor. In Lillian M. Newman, 1 T.C. 921, we held that the present petitioner, as an individual, had a substantial interest in the trust estate, which interest was adverse to that of his wife, and that the income was not taxable to her under sections 166 and 167. We further held that petitioner's wife had parted with all rights of ownership and control of the trust property and that she was not the owner thereof for the purposes of section 22(a). We further held that the trust income was not taxable to her under the rule of Douglas v. Willcuts, 296 U.S. 1; Stuart v. Helvering, 317 U.S. 154. Respondent concluded that the trust income was taxable to petitioner and determined the deficiency before us.
Respondent relies largely upon Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 Fed.(2d) 1; Jergens v. Commissioner, 136 Fed.(2d) 497, certiorari denied, 320 U.S. 784; and Richardson v. Commissioner, 121 Fed. (2d) 1, for the proposition that Helvering v. Clifford, supra, has not been limited in its application to cases where effort is made to tax settlors with trust income. Each of those cases involved the ownership for tax purposes of trust income by persons other than the grantors. In each case it was held that the taxpayer, because of his power and control over the trust property and the trust income, was taxable as the owner. However, in our opinion, the same conclusion is not justified here. In the Mallinckrodt case the petitioner had power to take all trust income except $10,000, and to take the trust corpus upon terminating the trust. In the Richardson case also the petitioner had power to take trust corpus upon termination by him of the trust. In the Jergens case the petitioner could withdraw all trust corpus, except that in case of certain insurance the trustor's consent was necessary.
Here, however, though the petitioner (not the settlor) could revoke the trust agreement in whole or in part and could alter or amend it, or free any property from its terms, he had, in our view, no power, as in the cases above mentioned, himself to receive the benefit of such action, either as to income or trust corpus. It is clear that the trust instrument contains no specific grant to him of such right, and we do not understand that it is so contended. Revocation alone would, of course, revest the trust corpus in the grantor; and upon any property being freed from the terms of the trust, by the petitioner, such property is required to be turned over to the grantor.
Does the general grant of power ‘to alter or amend‘ the trust confer upon the petitioner such right to take the benefit of the trust as to make him taxable upon its income? We think that a reasonable interpretation of the entire trust instrument requires a negative answer. The petitioner was given other and specific rights in the trust corpus; i.e., if living, to receive the remainder upon the death of the primary beneficiary, and to dispose of such remainder by will, or in default of testamentary disposition, to have the remainder go to his distributees, which we interpret to mean his heirs. The grant of such specific rights to the petitioner indicates to us that the indefinite expression ‘alter or amend‘ may not reasonably be interpreted to confer upon him additional power to take over or receive the trust income or corpus. In any event, petitioner may not, by such amendment or alteration, under any reasonable interpretation, dispose of the trust corpus to himself during the life of the primary beneficiary, for during the life of such beneficiary plainly his right to the entire trust income is the first concern of the grantor, and it may not, because of a general power to amend or alter, be diverted to the petitioner. This only serves to indicate further to us that the general power to alter or amend should not be construed to confer the power to destroy the trust, so far as primary beneficiaries are concerned, by conveyance to the petitioner; and we need not consider whether the power is in the petitioner as trustee or individually, for in neither case do we consider, under reasonable interpretation, that the language used vested in the petitioner the right to convey the trust corpus, and therefore income, to himself. Without that power, he may not, under any case cited or of which we know, be considered so completely in economic control of the trust as to be taxed upon its income. To so hold in the case of one not the settlor would be to broaden unjustifiably the concept embodied in Helvering v. Clifford, supra. We conclude and hold that the Commissioner erred in including the trust income in that of the petitioner.
Reviewed by the Court.
Decision will be entered under Rule 50.
HILL, J., dissenting: The majority have construed these trust agreements as denying petitioner the right to alter or amend them for his own benefit. Their holding is predicated on the theory that the grant to petitioner of particular rights and powers under clause third negatives any other intention. It is held that ‘The grant of such specific rights to the petitioner indicates to us that the indefinite expression 'alter or amend’ may not reasonably be interpreted to confer upon him additional power to take over or receive the trust income or corpus.‘ I can not agree that this conclusion is warranted. ‘Alter or amend‘ is not an indefinite expression and no interpretation is warranted to limit the unlimited power conferred upon petitioner to alter or amend the trusts.
Clause tenth expressly recognizes that petitioner will act in a dual capacity toward the trust property and its beneficiaries. Throughout the instrument he is not referred to by name except in clauses third and tenth. In all descriptions and enumerations of fiduciary powers and duties the word ‘trustee‘ alone is used. I think the lack of the word ‘trustee‘ is highly significant. In my opinion petitioner's power under clause tenth to alter or amend the trust instrument is not a power in trust under New York law, because no person or class of persons has been designated as a possible beneficiary of its exercise. See Real Property Law, Secs. 137 and 138, Consolidated Laws of New York. Petitioner, in his individual capacity, is empowered by clause tenth to change the beneficiary according to the dictates of his fancy and to substitute as a beneficiary thereunder whomsoever he desires. The rights of the named beneficiaries are subject to petitioner's powers as an individual under clause tenth. He could not be held accountable in any way for advising himself as trustee that he wished to substitute a beneficiary or otherwise revise the rights and interests of the named beneficiaries. But, assuming that petitioner could not secure any part of the income for himself, nevertheless his right to alter or amend the trust instruments so as to substitute beneficiaries of the trust income is sufficient, in my opinion, to warrant taxation of the trust income to him. See Louis Stockstrom, 3 T.C. 255; affd., 148 Fed.(2d) 491; Jergens v. Commissioner, 136 Fed.(2d) 497; certiorari denied, 320 U.S. 784. I think petitioner's power to so alter or amend the trust instrument, when coupled with the broad powers of management and control over the trust estate, and considering the facts and circumstances surrounding the execution of the trust instrument, is sufficient to hold petitioner taxable on the trust income on the authority of Helvering v. Clifford, 309 U.S. 331.
In these Clifford cases all of the facts and circumstances surrounding the execution of the trusts must be analyzed. In my opinion, the whole background of the creation of these trusts clearly demonstrates a carefully, logically planned course of action, with the tax consequences of the Newman family the primary consideration. We have here an intimate family group. The husband, petitioner herein, is a successful New York attorney, with a substantial income. He admits being an experienced practitioner in the law of trusts and trust estates and in Federal tax matters. The trust agreements under consideration were prepared in petitioner's law office. He joined in the execution of the agreements as a party thereto. The trusts were of substantial economic interest to him personally aside from his interest therein from the standpoint of the welfare of his wife and children. The trusts are doubtless couched in language designed definitely and without ambiguity to serve the ends which petitioner and the grantor, his wife, intended. Petitioner is given the power to alter and amend trusts or to revoke them in whole or in part. The language used in granting such power tolerates no limitation of the scope of the power to alter or amend or to revoke the trusts. If this power is a limited power we should be able to determine what the limitations are. Obviously such a determination would be impossible. Petitioner's net income for the year 1940, the year here involved, was approximately $77,000. The corpus of these trusts consisted of securities valued at $10,000, truly a small percentage of the amount of his income for that year. The total income from both trusts was approximately $830. It is obvious that the income from the trusts is of small concern to petitioner and his wife at the moment. However, the future is a different matter. Under the protection of the holding of the majority, petitioner and his wife have two tax-proof trusts. The corpus thereof can be increased from time to time in the sole discretion of petitioner and his wife with a resulting increase of trust income, and a lessening of their individual incomes.
Further, petitioner has the sole right to revoke the trust at any time merely by writing himself a letter as trustee. The trust property is then to be conveyed to petitioner's wife. This power exists in petitioner in his sole discretion. The relationship between petitioner and his wife is a friendly one and will be presumed to continue. At the present time, in view of the size of petitioner's income, it does not appear that he will ever require the small amount of money constituting the corpus of these trusts. In the future, if he should ever need it, the money is his for the taking. Considering the whole bundle of rights and powers given to petitioner as an individual over the trust income and trust estate, I think the doctrine of the Clifford case requires the holding that petitioner is the substantive owner of the trust estate and that the income therefrom is taxable to him under section 22(a) of the Internal Revenue Code.
TURNER, SMITH, ARNOLD, KERN, and OPPER, JJ., agree with this dissent.