Opinion
This case having been heard by the Court of Claims, the court, upon the evidence and the report of a commissioner, makes the following special findings of fact:
1. Irving J. Reuter, the plaintiff herein, is a resident citizen of the United States and resides in the City of Miami Beach, Florida.
2. February 8, 1932, plaintiff established a trust known and designated as "The Janirv Trust fund" by the execution of a declaration of trust dated on that date, copy of which is attached to a stipulation filed in this proceeding as Exhibit 1, and made a part hereof by reference. Some of the more material provisions are referred to or set out in following findings.
3. In the declaration of trust, plaintiff designated himself as trustee with respect to certain securities which he then owned and which he, under the trust, transferred and assigned to the trustee. Included among the securities so transferred were 13,527 shares of stock of the General Motors Securities Company. The trust provided that the trustee should hold the securities in trust to collect the income therefrom and that the trustee should have broad discretionary powers with respect to the reinvestment of funds which might become available under the trust for such purpose. The trust further provided that the income derived from the corpus of the trust would be disposed of in the following manner:
"1. Included among the property forming the corpus of this trust are 13,527 shares of the Common Stock of the General Motors Securities Company, the net income from said 13,527 shares of General Motors Securities Company stock to be distributed as follows:
"(a) Nine tenths (9/10ths) of the annual net income from said General Motors Securities Company stock shall be paid to Jeanette M. Reuter in an amount up to but not exceeding Thirty Thousand Dollars ($30,000.00) in any calendar year during the existence or life of this trust. "(b) One-tenth (1/10th) of the annual net income from said General Motors Securities Company stock shall be paid to Jacob Reuter and Wilhelmina Reuter jointly in an amount up to but not exceeding Three Thousand Dollars ($3,000.00) in any calendar year during the existence or life of this trust. "(c) The excess of the annual net income from said 13,527 shares of General Motors Securities Company stock shall become corpus or principal of this trust and shall be administered in the same way and manner and under all the terms and conditions of this trust, the same as though said excess income had originally been deposited as part of the original corpus of this trust.
"In the event that the said General Motors Securities Company should change its name or its place of incorporation or should retire the above-described stock and issue in lieu thereof, or in conjunction therewith, some other kind or type of securities, whether same be common stock, preferred stock, bonds, notes, or debentures, or in the event the General Motors Securities Company should dissolve or liquidate and retire its stock by the payment of cash or the issuance of other securities, as Grantor hereof, it is my intention that whatever other property of whatever kind and nature is substituted for the 13,527 shares of General Motors Securities Company stock herein deposited, shall be held by the Trustee hereunder in the same manner as though no change in the type of that security had taken place, and if a change should be effected, the income from the property received in lieu of the 13,527 shares of General Motors Securities Company stock deposited hereunder shall be paid to the beneficiaries as hereinbefore provided.
"2. The balance of the net income from this trust shall be retained by the Trustee, which income shall become corpus or principal of this trust and be administered by the Trustee in the same way and manner and under all the terms and conditions of this trust, the same as though said excess income had originally been deposited as part of the original corpus of this trust."
Jeannette M. Reuter, referred to above, was the wife of plaintiff and Jacob Reuter and Wilhelmina Reuter were his parents.
4. The trust instrument further provided that:
"This trust shall be irrevocable for at least a period of five years from and after January 1, 1932, and terminate only in the manner following:
"A. The Grantor may terminate this trust at any time after the expiration of five years from January 1, 1932, provided, however, he shall evidence his election in writing, serving notice of said election to terminate said trust upon the beneficiaries herein named; provided further that the notice to terminate said trust shall be given the beneficiaries herein named at least thirty days prior to the expiration of five years dating from January 1, 1932. "B. If the Grantor shall not survive the minimum life of this trust (five years from January 1, 1932), then and in that event this trust shall continue for a period of ten years from and after January 1, 1932. At the expiration of said ten-year period, this trust shall terminate and the property therein shall be paid and turned over to Jeanette M. Reuter; Provided, however, if Jacob Reuter and/or Wilhelmina Reuter are living at the time said trust thus terminates, ample provision shall be made by the Trustee hereunder or by the said Jeanette M. Reuter to provide an annual net income of Three Thousand Dollars ($3,000.00) to be paid Jacob Reuter and/or Wilhelmina Reuter for and during the life of said Jacob Reuter and/or Wilhelmina Reuter. "C. In the event of the death of said Jeanette M. Reuter prior to the termination of this trust as herein provided, and the Grantor survives said Jeanette M. Reuter, this trust shall continue in full force and effect and any income in the hands of the Trustee remaining undistributed, but distributable to the said Jeanette M. Reuter, shall become corpus of said trust, and thereafter the net income of said trust shall accumulate and become corpus of said trust, except so much thereof, up to Three Thousand dollars ($3,000.00), as shall become distributable to Jacob Reuter and Wilhelmina Reuter as hereinbefore provided. It is further provided, however, that the surplus income accruing after the death of Jeanette M. Reuter may be distributed by said Trustee within his discretion unto Jacob Reuter, Wilhelmina Reuter and/or the Grantor hereof. The judgment and decision of the Trustee in this matter shall be conclusive, final and binding upon said trust and any income accumulated in any one year and not distributed through the exercise of the discretion vested in the Trustee shall immediately become corpus and not subject to distribution as undistributed income in the succeeding year. In other words, undistributed income shall not accumulate from year to year and be distributable in the succeeding year."
5. The trustee was authorized in his sole discretion, to invade the corpus of the trust to make payments to the beneficiaries, if at any time the net income of the trust was insufficient for their proper maintenance and support or that of any member of the family of a beneficiary.
6. In providing for broad authority in the trustee to sell, assign, convey, encumber, or otherwise deal with the corpus of the trust, the instrument stated that it was the intention of the grantor (plaintiff) "to vest discretion, authority and full power in my Trustee as to the advisability of retaining any assets deposited or at any time held hereunder even though all or any portion of said assets do not constitute legal trust investments within the Michigan law. The Trustee shall not be liable for any loss by depreciation in the value of said trust property unless such loss occurs through his bad faith or wilful neglect or default."
7. The trust instrument further provided that no part of the trust estate should be subject to transfer, assignment, sale or pledge by any beneficiary or be seized in any manner or held liable for the beneficiary's debts, contracts or obligations of any character. The trustee was authorized, in his discretion, to compromise and settle claims for or against the trust estate and to consent to the reorganization, merger or consolidation of corporations whose securities were held by him.
In the event of the death of plaintiff prior to the termination of the trust, provision was made for a successor trustee who would have substantially the same powers as plaintiff except that investments made by the successor-trustee must be in income-producing securities which constitute legal trust investments under the laws of Michigan.
8. On March 15, 1935, plaintiff filed with the Collector of Internal Revenue for the District of Michigan a federal income tax return for the year 1934 showing a total tax due of $20,151.15 which was paid in installments on march 20, 1935, June 17, 1935, September 16, 1935, and December 10, 1935. On this return the plaintiff did not report any of the income received by the trustee of "The Janirv Trust Fund", above mentioned, during the year 1934. Subsequently in April, 1936, pursuant to a revenue agent's report received by plaintiff, a deficiency in 1934 income tax was paid by him in the amount of $1,258.19. That deficiency was based on the inclusion in plaintiff's taxable income of the income received by the trust during 1934, exclusive of dividends received by the trust on General Motors Securities Company stock held by it, for the reason that the income under the terms of the declaration of trust was accumulated for the benefit of plaintiff.
9. On October 23, 1937, a supplemental revenue agent's report was received by plaintiff proposing further to increase plaintiff's income for the year 1934 by adding thereto the amount of $20,348.07, the same being the amount received by "The Janirv Trust Fund" during the year as dividends on General Motors Securities Company stock held by it, which dividends had been distributed by the trustee, namely, Jeanette M. Reuter, Jacob Reuter and Wilhelmina Reuter. As a result of this adjustment the revenue agent's report proposed a deficiency in 1934 income tax against the plaintiff in the amount of $10,038.93.
10. Subsequently, the deficiency of $10,038.93, together with interest in the amount of $1,761.76, was assessed against plaintiff and on March 3, 1938, the plaintiff paid to the Collector of Internal Revenue for the District of Michigan the sum of those amounts, that is, $11,800.69. The entire deficiency thus paid by plaintiff on March 3, 1938, for the recovery of which this proceeding was brought, resulted from the inclusion in plaintiff's income for the year of 1934 of the dividends on General Motors Securities Company stock.
11. On March 21, 1938, plaintiff filed with the Collector of Internal Revenue for the District of Michigan a claim for refund of the tax and interest paid by him in the amount of $11,800.69.
12. The petition in this cause was filed on January 18, 1939, more than six months after the date of the filing on March 21, 1938, of the claim for refund. During the period from march 21, 1938, to January 18, 1939, no action on the claim was taken by the Commissioner of Internal Revenue.
On May 27, 1939, plaintiff was informed that the claim for refund filed on March 21, 1938, would be rejected for the reason that "a suit involving the tax liability is pending in the United States Court of Claims." On May 31, 1939, plaintiff was advised by registered mail that the claim had been disallowed.
The deficiency of income tax paid by the plaintiff for the year 1934 in the amount of $10,038.93, together with interest in the amount of $1,761.76, was die and payable only by reason of the inclusion in his taxable income for the year of the amount of $20,328.07, the same representing income received by "The Janirv Trust Fund" from its holdings of General Motors Securities Companies stock. Arthur L. Evely, of Detroit, Mich. (Raymond H. Berry, of Detroit, Mich., on the brief), for plaintiff.
Elizabeth B. Davis, of Washington, D.C., and Samuel O. Clark, Asst. Atty. Gen. (Robert N. Anderson and Fred K. Dyar, both of Washington, D.C., on the brief), for defendant.
Before WHALEY, Chief Justice, and WHITAKER, LITTLETON, and GREEN, Judges.
WHALEY, Chief Justice.
This suit involves the recovery of income taxes paid by plaintiff for the year 1934. A declaration of trust was made by the plaintiff in which he named himself as the trustee and the sole question in this case is whether under the provisions of this case is whether under the provisions of this trust the plaintiff may still be treated, for the purpose of the taxing statute, as the owner of the corpus and therefore taxable on the income derived therefrom.
In 1932, the plaintiff made a declaration of trust in which he designated himself as trustee and named his wife and father and mother as the beneficiaries, the former receiving nine-tenths of the income and the latter two receiving one-tenth with the reservation that the combined incomes should not exceed $33,000, and that all over this amount earned by the trust should form part of the corpus of the estate created. The trust was irrevocable for a period of five years and could be terminated at the end of that time by the plaintiff serving notice upon the beneficiaries at least thirty days prior to the time of his election to terminate the trust. Should the plaintiff die during the five years, the trust was to continue for a period of ten years, at the expiration of which period the assets of the trust would be turned over to plaintiff's wife with certain provisions for the same income for his parents, if living. If the wife should die prior to the termination of the trust, and the plaintiff survive her, the trust was to continue in effect and the income otherwise distributed to her was to accumulate and become corpus of the trust.
Broad and almost unlimited powers were bestowed upon the trustee to deal with the trust property upon such terms and conditions as he deemed best. The trust provided that it was the intention of the plaintiff "to vest discretion, authority, and full power" in the trustee to deal with the assets without regard to whether investments were within the scope of those limited to a trustee under the laws of Michigan, in which a fiduciary could invest.
The trustee was not liable for any loss in value of the property unless occasioned by his bad faith, wilful neglect, or default. Stock dividends, rights to subscribe to stock or debentures, or any other such form of securities were to become corpus and not to be considered income subject to distribution. Provision was made that no part of the trust could be subject to transfer, assignment, sale, pledge, or anticipation by any beneficiary or liable for the debts of any beneficiary. The trustee was also given power, in his discretion, to compromise and settle claims, to consent to the reorganization or other changes in any corporation whose stock was held by the trustee and generally to take such other action incident thereto as he deemed necessary or expedient. Provision was made for the appointment of a successor trustee should be limited as to investments to income-producing securities which constituted legal trust investments under laws of Michigan.
During the year 1934 dividends were paid on certain stocks which formed part of the trust property and the plaintiff distributed this income to the beneficiaries. Plaintiff did not include these dividends in his personal income tax return. The Commissioner of Internal Revenue did include this income in the plaintiff's tax return and this determination of the Commissioner gave rise to a deficiency which plaintiff paid with interest. After the filing of a claim for refund and its rejection, plaintiff instituted this suit for the recovery of the amount paid by him on this income.
In the original brief filed, the plaintiff contended that the income of the trust was not taxable by reason of Section 166 of the Revenue Act of 1934, 26 U.S.C.A. Int.Rev.Code, § 166. However, subsequent to the filing of that brief, the case of Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 557, 84 L.Ed. 788, dealing with a similar situation, was decided by the Supreme Court on February 26, 1940, wherein it was pointed out that the provisions of Section 166 do not subtract from the general definition of income contained in section 22(a) of the Revenue Act of 1934, 48 Stat. 680, 26 U.S.C.A. Int.Rev.Acts, page 669, and that since the court was of the opinion that the income there in question came within the broad provision of section 22(a) it was unnecessary to discuss the applicability of section 166.
The Clifford case, supra, and the instant case are similar in all respects and the provisions in the two trusts are almost indistinguishable. They differ in minor and immaterial points. In the Clifford case, the income was given to the wife. In the instant case nine-tenths of the income was given to the wife and one-tenth to the parents. In both cases the income from the trust was kept within an "intimate family group" and the grantor remained in control of the corpus in an almost unlimited way. In neither case has the grantor divested himself of ownership of the property so as to be considered no longer the owner of the property for the purposes of section 22(a) which provides in its broad terms for the inclusion in gross income of " * * * gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever."
In view of the decision in Helvering v. Clifford, above, there can be no question that plaintiff retained such a substantial control over the property in question, after its transfer to the trust, that he must be considered the owner for the purposes of section 22(a) and therefore taxable on the income derived therefrom. As was said by the court in the Clifford case, supra, "We have at best a temporary reallocation of income within an intimate family group. Since the income remains in the family and since the husband retains control over the investment, he has rather complete assurance that the trust will not effect any substantial change in his economic position. It is hard to imagine that respondent felt himself the poorer after this trust had been executed or, if he did, that it had any rational foundation in fact. For as a result of the terms of the trust and the intimacy of the familial relationship respondent retained the substance of full enjoyment of all the rights which previously he had in the property. That might not be true if only strictly legal rights were considered. But when the benefits flowing to him indirectly through the wife are added to the legal rights he retained, the aggregate may be said to be a fair equivalent of what he previously had."
The whole intention of the trust provisions was that plaintiff should retain full possession and control of the assets of the trust and thus avoid the inclusion in his personal income tax return of that portion which was paid to his wife and parents.
The Commissioner of Internal Revenue was correct in his determination.
The petition must be dismissed. It is so ordered.