Opinion
Docket Nos. 4903 4904.
1945-12-12
BLANCHE N. HALLOWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.HOWARD T. HALLOWELL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Early L. Gilbert, C.P.A., for the petitioners. William D. Harris, Esq., for the respondent.
1. Howard T. Hallowell created two irrevocable trusts under which the entire income was payable to his wife Blanche during her life, upon her written request to the trustee, provided she made request within 30 days after the expiration of the fiscal year of the trust. Undistributed income shall be added to trust principal. Upon the death of the wife, the trustee shall continue to hold the trust and shall pay the income to such persons as directed by the will of Blanche. The trustee reported the income of the trusts on a fiscal year basis. Blanche Hallowell reported her income on a calendar year basis. The fiscal year of each trust ended during a calendar year of Blanche Hallowell. Held, that the income of each trust accumulated during the respective fiscal years of the trusts is taxable to the petitioner Blanche Hallowell, not as income ‘to be distributed currently‘ under code section 162(b), but by reason of the power given to the beneficiary to receive such income each year upon request, which must be regarded as the equivalent of ownership of the income under section 22(a). Although there are some differences between the provisions of the trusts created by Hallowell and of the trust in Mallinckrodt v. Nunan, 146 Fed.(2d) 1, the differences do not distinguish the trusts from the Mallinckrodt trust.
2. Respondent's determination in Docket No. 4904 that petitioner Howard Hallowell is taxable under section 22(a) on the income of the same trusts is reversed. Early L. Gilbert, C.P.A., for the petitioners. William D. Harris, Esq., for the respondent.
The respondent determined deficiencies in income tax against the petitioners as follows:
+----------------------------------------+ ¦Blanche N. Hallowell¦Howard T. Hallowell¦ +--------------------+-------------------¦ ¦Docket No. 4903 ¦Docket No. 4904 ¦ +--------------------+-------------------¦ ¦1938 ¦$2,723.38 ¦1938 ¦$4,889.09 ¦ +-----+--------------+-----+-------------¦ ¦1939 ¦757.23 ¦1939 ¦1,883.63 ¦ +-----+--------------+-----+-------------¦ ¦1940 ¦13,035.74 ¦1940 ¦22,600.94 ¦ +-----+--------------+-----+-------------¦ ¦ ¦ ¦1941 ¦27,233.69 ¦ +----------------------------------------+
The only question at issue is whether either of the petitioners is taxable upon the undistributed income of the two trusts created by Howard T. Hallowell. Respondent has determined that such income is taxable to Howard T. Hallowell as the grantor of the trusts, or, in the alternative, to Blanche N. Hallowell by reason of the right given to her under the trust indentures to take part or all of the annual income.
The petitioners filed their separate, individual returns for the taxable years with the collector for the first district of Pennsylvania.
The facts have been stipulated.
FINDINGS OF FACT.
We adopt the stipulation of facts filed by the parties, and such stipulated facts are incorporated herein by reference. Only those facts essential to an understanding of the issue are set forth herein.
The petitioners are married and reside together at Jenkintown, Pennsylvania. They have a son, H. Thomas Hallowell, Jr.; a daughter, Ruth Hallowell Gray; and three grandchildren, Howard T. Hallowell, III, Anne Willits Hallowell, and Merrit Willits Hallowell.
On December 23, 1935, petitioner Howard T. Hallowell executed an irrevocable trust indenture under which he transferred 1,000 shares of the common stock of the Standard Pressed Steel Co. to his son, H. Thomas Hallowell, Jr., as trustee. Under the provisions of the trust, the net income was to be paid to the grantor's wife, Blanche N. Hallowell, during her life, and upon her death the corpus was to be divided into two equal parts, one of which was to be paid over outright to H. Thomas Hallowell, Jr., and the other to be held in trust for the grantor's daughter, Ruth N. Hallowell, with the income thereof to be paid to her during her life. Upon her death, the corpus was to be paid over to her children, and, in default thereof, to H. Thomas Hallowell, Jr. This was known as the No. 1 trust, and it is not in controversy in this proceeding.
On September 27, 1937, petitioner Howard T. Hallowell executed another irrevocable trust instrument, known as the No. 2 trust. The corpus consisted of 1,500 shares of the common stock of the Standard Pressed Steel Co., and the trustee was H. Thomas Hallowell, Jr. At that time, the grantor had two grandchildren. The trust instrument provided that the corpus was to be divided into two separate parts, representing the interests of each of the grandchildren, but the trustee was authorized, as additional grandchildren were born, to redivide the corpus into shares representing the individual distributive interests of the respective grandchildren. Paragraph 2 of the indenture provided, as follows:
2. The said Trustee shall hold said shares of stock and any stock dividends paid thereon intact during the natural life of my wife, Blanche N. Hallowell, and collect the net income thereof. Within thirty days after the expiration of any fiscal year the beneficiary shall notify the Trustee in writing if she desires the income collected during the past fiscal year or any part thereof paid to her. Any part of said income retained shall be added to the principal of said trust estates. The Trustee shall have the right at the end of any year, in case there is no income or insufficient income has been received during the immediate past year, to provide for the comfortable support and maintenance of the beneficiary, to recognize and act upon said request, and pay out from principal or corpus on written notice from the beneficiary to the Trustee during said period of thirty days after the expiration of any fiscal year such sums as may be necessary for the comfortable support and maintenance of said beneficiary.
Without in any way limiting the foregoing, the Trustee may if he deems it to be of benefit to the trust or the beneficiary pay out to the beneficiary all or such part of the income as received as he may from time to time deem advisable.
Upon the death of the grantor's wife the trustee shall continue to hold the trust estate and shall pay the net income of the trust ‘to such person or persons now living as directed by the last will and testament of my said wife, ‘ and in default thereof in equal shares to the grantor's son, H. Thomas Hallowell, Jr., and to the grantor's daughter, Ruth N. Hallowell Gray, for their lives. Upon the death of both of the grantor's children the corpus was to be paid over to the grandchildren, per capita, share and share alike, with the children of any deceased grandchild to receive their parent's share. In the event that there were no grandchildren or their issue, life estates were created for two of the grantor's sisters, and upon their deaths the corpus was to be paid over to the trustees of the Philadelphia Yearly Meeting of Friends for the use of George School. Under the trust indenture the trustee was given broad powers of management, was authorized to appoint his successor trustee, and could file fiduciary income tax returns on either the fiscal or the calendar year basis. The grantor reserved the right to transfer additional securities or property to the trust. The trust also contained the provision that ‘it is recommended that during the lifetime of said Howard T. Hallowell, grantor herein, and during the continuance of this trust or any part thereof, the said Trustee or his successor shall appoint said Howard T. Hallowell as proxy to vote at any stockholders' meetings on any stock held by this trust. ‘ It was also provided that the transfer of the corpus by the grantor to the trust was absolute, without any reservation of control over the corpus and without any interest in the income thereof.
On November 25, 1939, petitioner Howard T. Hallowell executed a third irrevocable trust indenture, known as the No. 3 trust. The corpus consisted of 1,500 shares of common stock of the Standard Pressed Steel Co., and the trustee was H. Thomas Hallowell, Jr. The provisions of this trust were exactly the same as the provisions of trust No. 2, except that this trust contained the following additional provision:
Said Trustee or his successors may, at any time he or they deem it to be proper and advisable so to do, hypothecate all or any part of the assets then constituting the corpus of the said trusts and use the proceeds of said pledge for the purpose of buying additional shares of stock of the Standard Pressed Steel Company, or for the purpose of protecting the interests of the trusts in the Standard Pressed Steel Company, or said Trustee or his successors may lend the said proceeds of said pledge or other funds of the trust to said company for its corporate use if said Trustee or his successors shall then deem it advisable so to do, and any such loan or loans or advances may be made on such terms of security and repayment as the Trustee or his successors in his or their discretion may deem to be sufficient and proper at the time. The purpose of said power being to enable the Trustee or his successors to be able to secure funds and use the same for the protection of the stock investments of the trusts under any contingencies that may happen which might jeopardize the value of the holdings of said stock.
Petitioner Howard T. Hallowell filed gift tax returns in respect to trusts Nos. 1, 2, and 3.
Petitioner Howard T. Hallowell now is and has been president of Standard Pressed Steel Co. since it was organized and incorporated under Pennsylvania law in 1903. Prior to the creation of trusts Nos. 2 and 3, Howard T. Hallowell owned 3,364 shares of the common stock of Standard Pressed Steel Co. After the creation of these trusts, he owned, and still owns, 364 shares. The total number of shares of the common stock of the company issued and outstanding during the years 1938 to 1941, inclusive, was 12,792 shares.
During the period 1938 to 1942, inclusive, petitioner Blanche N. Hallowell received and reported in her individual income tax returns the following amounts of income:
+---------------------------------------+ ¦ ¦Income received¦ ¦ ¦ +----+---------------+---------+--------¦ ¦Year¦from trust ¦Dividends¦Interest¦ +----+---------------+---------+--------¦ ¦ ¦No. 1 ¦ ¦ ¦ +----+---------------+---------+--------¦ ¦1938¦$3,000.00 ¦$689.00 ¦$604.12 ¦ +----+---------------+---------+--------¦ ¦1939¦11,491.26 ¦1,527.15 ¦ ¦ +----+---------------+---------+--------¦ ¦1940¦13,000.00 ¦1,949.39 ¦360.00 ¦ +----+---------------+---------+--------¦ ¦1941¦13,000.00 ¦2,025.37 ¦420.00 ¦ +----+---------------+---------+--------¦ ¦1942¦15,000.00 ¦2,273.36 ¦422.38 ¦ +---------------------------------------+
No part of this income has been used for her support or the support of her husband, or for the maintenance of the home occupied by her and her husband. There is no agreement between the petitioners that any of income of the trusts is in substitution of the responsibility of petitioner Howard T. Hallowell to support petitioner Blanche N. Hallowell or any member of their family.
During the period 1936 to 1943, inclusive, Howard T. Hallowell received income which he reported in his individual income tax returns, as follows:
+----------------------------------------+ ¦ ¦Dividends and¦ ¦ ¦ +----+-------------+----------+----------¦ ¦Year¦interest ¦Salaries ¦Total ¦ +----+-------------+----------+----------¦ ¦1936¦$50,284.72 ¦$33,237.50¦$83,522.22¦ +----+-------------+----------+----------¦ ¦1937¦36,212.40 ¦33,046.88 ¦69,259.28 ¦ +----+-------------+----------+----------¦ ¦1938¦14,684.46 ¦14,194.16 ¦28,878.62 ¦ +----+-------------+----------+----------¦ ¦1939¦17,303.17 ¦32,549.80 ¦49,852.97 ¦ +----+-------------+----------+----------¦ ¦1940¦17,154.56 ¦62,601.23 ¦79,755.79 ¦ +----+-------------+----------+----------¦ ¦1941¦21,164.77 ¦90,496.47 ¦111,661.24¦ +----+-------------+----------+----------¦ ¦1942¦24,473.57 ¦90,436.85 ¦114,910.42¦ +----+-------------+----------+----------¦ ¦1943¦24,874.66 ¦90,516.25 ¦115,390.91¦ +----------------------------------------+
The annual income of trusts Nos. 2 and 3 on a cash receipts and disbursements basis was as follows:
+---------------------------------------+ ¦Year¦Trust No. 2¦Trust No. 3¦Total ¦ +----+-----------+-----------+----------¦ ¦1938¦$20,370.00 ¦ ¦$20,370.00¦ +----+-----------+-----------+----------¦ ¦1939¦5,490.00 ¦ ¦5,490.00 ¦ +----+-----------+-----------+----------¦ ¦1940¦17,608.24 ¦$16,500.00 ¦34,108.24 ¦ +----+-----------+-----------+----------¦ ¦1941¦19,957.98 ¦18,886.27 ¦38,844.25 ¦ +----+-----------+-----------+----------¦ ¦1942¦21,190.36 ¦19,591.96 ¦40,782.32 ¦ +---------------------------------------+
The trustee of trusts Nos. 2 and 3 reported the income of said trusts for the years 1938, 1939, 1940, and 1941 on a fiscal year basis and included in the Federal income tax returns filed by the trustee of trusts Nos. 2 and 3 on a cash receipts and disbursements basis on behalf of the then possible beneficiaries of the then possible trusts, as follows:
+-----------------------------------------------------------------------------+ ¦ ¦Trust u/d 9/27/37 ¦Trust u/d 9/27/37¦Trust u/d 9/27/37 ¦ ¦ ¦ ¦for Howard T. ¦for Anne Willits ¦for Merrit Willits¦Total ¦ ¦ ¦Hallowell, 3rd ¦Hallowell ¦Hallowell ¦ ¦ +----------+------------------+-----------------+------------------+----------¦ ¦Fiscal ¦ ¦ ¦ ¦ ¦ ¦year ended¦$10,185.00 ¦$10,185.00 ¦ ¦$20,370.00¦ ¦8/31/38 ¦ ¦ ¦ ¦ ¦ +----------+------------------+-----------------+------------------+----------¦ ¦8/31/39 ¦2,745.00 ¦2,745.00 ¦ ¦5,490.00 ¦ +----------+------------------+-----------------+------------------+----------¦ ¦8/31/40 ¦5,869.42 ¦5,869.41 ¦$5,869.41 ¦17,608.24 ¦ +----------+------------------+-----------------+------------------+----------¦ ¦8/31/41 ¦6,652.66 ¦6,652.66 ¦6,652.66 ¦19,957.98 ¦ +-----------------------------------------------------------------------------+
Trust u/d 11/25/39 Trust u/d 11/25/39 Trust u/d 11/25/39 for Howard T. for Anne Willits for Merrit Willits Total Hallowell, 3rd Hallowell Hallowell Fiscal year ended $5,500.00 $5,500.00 $5,500.00 $16,500.00 10/31/40 10/31/41 6,295.43 6,295.42 6,295.42 18,886.27
The trustee for trusts Nos. 2 and 3 kept his books of account and filed his Federal income tax returns on a fiscal year basis. The petitioners kept their books and filed their returns on a calendar year basis.
All income received by the trustee under trusts Nos. 2 and 3 has been accumulated, and none of such income has been paid by the trustee to any person.
OPINION.
HARRON, Judge:
Respondent's first contention is that the income of trusts Nos. 2 and 3 is taxable to petitioner Blanche No. Hallowell under section 22(a), as that section has been construed in Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 Fed.(2d) 1; certiorari denied April 9, 1945; rehearing denied April 30, 1945. This contention is predicated upon paragraph 2 of the trust indentures, which gives Blanche the unrestricted right to demand the income of the trusts within thirty days after the expiration of the fiscal year of each trust. Since the fiscal year of trusts Nos. 2 and 3 ended on August 31 and October 31, respectively, respondent argues that petitioner, who was on a calendar year basis, had the unconditional power to receive the income of the trusts during each of her taxable years. We think this contention must be sustained.
In Edward Mallinckrodt, Jr., supra, we held that a trust beneficiary who was entitled to receive the income of a trust upon his request was taxable upon such income, even though it was neither requested nor received by him during the taxable years. In support of our opinion we cited and relied upon Corliss v. Bowers, 281 U.S. 376, where it was pointed out that ‘if a man disposes of a fund in such a way that another is allowed to enjoy the income which it is in the power of the first to appropriate it does not matter whether the permission is given by assent or by failure to express dissent * * *‘ and that ‘the income that is subject to a man's unfettered command and that he is free to enjoy at his own option may be taxed to him as his income, whether he sees fit to enjoy it or not.‘ It is true that in the Mallinckrodt case, supra, the beneficiary was also a trustee and was given a general power of appointment by will over the property comprising the trust estate. In addition, with the consent of the other trustee, he might during his lifetime receive portions of the corpus, and upon termination of the trust, which was in the discretion of the trustees, he would receive the entire corpus. However, despite these additional powers, which are not present in this proceeding, our decision was primarily based upon the concept that one may not avoid taxation by turning his back upon funds that are his for the asking. This was also the basis upon which this Court was affirmed by the Circuit Court of Appeals for the Eighth Circuit, for in its opinion the Circuit Court said:
We agree with the majority of the Tax Court that implications which fairly may be drawn from the opinions of the Supreme Court in Corliss v. Bowers, 281 U.S. 376, 378, supra, Helvering v. Clifford, 309 U.S. 331, supra, and other cases relative to the taxability of trust income to one having command over it, justify, if they do not compel, the conclusion that the undistributed net income of the trust in suit, during the years in question, was taxable to petitioner under Sec. 22(a). This, because the power of petitioner to receive this trust income each year, upon request, can be regarded as the equivalent of ownership of the income for purposes of taxation. In Harrison v. Schaffner, 312 U.S. 579, 580, the Supreme Court approved ‘the principle that the power to dispose of income is the equivalent of ownership of it and that the exercise of the power to procure its payment to another, whether to pay a debt or to make a gift, is within the reach of the statute taxing income 'derived from any source whatever’.‘ It seems to us, as it did to the majority of the Tax Court, that it is the possession of power over the disposition of trust income which is of significance in determining whether, under Sec. 22(a), the income is taxable to the possessor of such power, and that logically it makes no difference whether the possessor is a grantor who retained the power or a beneficiary who acquired it from another. See Jergens v. Commissioner, supra, (p. 498 of 136 F. (2d).). Since the trust income in suit was available to petitioner upon request in each of the years involved, he had in each of those years the ‘realizable‘ economic gain necessary to make the income taxable to him. See Helvering v. Stuart, 317 U.S. 154, 168-169; Helvering v. Clifford, supra (pages 336-337 of 309 U.S.); Helvering v. Gordon, 8 Cir., 87 F.(2d) 663, 667.
Here, as in the Mallinckrodt case, supra, Blanche, upon her request, could receive the entire income of the trusts during each of her taxable years. If she did not request such income, it became part of the corpus and eventually would go to her grandchildren. During the taxable years, and since the inception of the trusts, none of the income was distributed. However, the unrestricted right which Blanche had to receive the income is the equivalent of ownership of the income for purposes of taxation.
Petitioner argues, however, that the principle of the Mallinckrodt case is not applicable here because she did not have the right to receive the income of the trusts during the fiscal years of the trusts. This argument is untenable.
It is recognized that the Hallowell trusts contain a provision which was not present in the Mallinckrodt trust, namely, that the trustee may pay to Blanche Hallowell all or part of the income ‘as received as he may from time to time deem advisable,‘ if he considers payment to be of benefit to the trust or the beneficiary. This provision gives the trustee a discretionary power to distribute trust income to Blanche Hallowell, but it does not limit in any way her right to request, at the end of a fiscal year, distribution to her of income which has been collected during a fiscal year and held by the trustee. Because the beneficiary has the power to receive trust income each year upon request, regardless of whether or not the trustee has exercised a discretionary power to distribute income to her, the conclusion must be that the undistributed income of the trusts in question for the taxable years involved was taxable to her under section 22(a), under the rule of the Clifford case, as applied in the Mallinckrodt case. The power of the beneficiary to receive income at the end of a fiscal year is the controlling and ultimate power over the disposition of the trust income. In our opinion, in Edward Mallinckrodt, Jr., supra, at pp. 1133 and 1134, we gave consideration to the relationship in the Internal Revenue Code of sections 161 and 162 to section 22(a) in the light of the Clifford case. The question here, as in the Mallinckrodt case, arises under section 22(a), and it must be decided under the broad reach of that section. Petitioner Blanche Hallowell was the owner of the income from the Hallowell trusts for purposes of section 22(a). It is the existence of a power in her which is determinative of the question, not the amount of income which goes to her under her exercise of power. The only effect of any exercise of a discretionary power by the trustee during any fiscal year of a trust is upon the amount of income to be received by the beneficiary when she makes her request to the trustee in the exercise of her power. In any event, the beneficiary, rather than the trust, is taxable upon all of the annual income of the trusts under the principle of the Clifford and Mallinckrodt cases. The important factor is that during her taxable year she had the unconditional power to receive the trust income. That power justified the taxability of the trust income to her, for it is command over income which warrants the imposition of the tax.
Having decided the main question in respondent's favor, it is unnecessary to consider his alternative contention under Docket No. 4904 that Howard T. Hallowell, the grantor of the trusts, is taxable on the income of the trusts under the doctrine of the Clifford case. Respondent has determined that the income of the trusts is taxable to Howard T. Hallowell, and part of the deficiencies in Docket No. 4904 are due to that determination. Of course, respondent does not seek to tax the same income twice, to both Howard T. and Blanche N. Hallowell. Accordingly, in view of our holding in Docket No. 4903, the determination of respondent in Docket No. 4904 relating to the same income of the same trusts is reversed. However, there must be a recomputation of income tax liability in Docket No. 4904, under Rule 50, because certain other adjustments were not contested.
Reviewed by the Court.
Decision will be entered for the respondent in Docket No. 4903, and decision will be entered under Rule 50 in Docket No. 4904.