Opinion
Docket Nos. 692 3124 693 3123.
1945-02-28
EDWARD E. BISHOP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.LILLIAN H. BISHOP, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Edmond L. Jones, Esq., and James C. Rogers, Esq., for the petitioners. P. A. Bayer, Esq., for the respondent.
Petitioners, husband and wife, simultaneously created trusts of approximately equal value for each other for life with remainder over; each life beneficiary was given a general testamentary power of appointment of the corpus in lieu of the remainders; income was distributable at the discretion of the corporation trustee, whom the life beneficiary was given the power to change at will from time to time to any other corporate trustee; and prior to and outside the indentures, the trustee agreed with petitioners to pay the income at the request of the life beneficiary. Held, the income of each trust is taxable to the petitioner-life beneficiary under section 22(a) of the Revenue Act of 1938 and the Internal Revenue Code. Edmond L. Jones, Esq., and James C. Rogers, Esq., for the petitioners. P. A. Bayer, Esq., for the respondent.
These proceedings involve proposed deficiencies in income tax as follows:
+---+ ¦¦¦¦¦ +---+
Name Docket No. Year Deficiency (1938 $4,119.55 Edward E. Bishop 692 (1939 3,773.07 (1940 6,626.50 Do 3124 1941 9,088.05 (1938 4,004.51 Lillian H. Bishop 693 (1939 3,986.26 (1940 6,579.03 Do 3123 1941 8,654.19
The principal issue is whether certain undistributed income received by trusts created by each of the petitioners naming the other petitioner as life beneficiary is taxable to petitioners. If our decision is based upon the proposition that the transfers in trust were not gifts, the question is raised as to whether the Tax Court has jurisdiction over the gift taxes paid by these petitioners for the year 1935. A further issue is whether certain amounts expended for statistical services are deductible from the income of petitioner Edward E. Bishop for the years 1938, 1939, and 1940.
FINDINGS OF FACT.
The petitioners, Edward E. Bishop and Lillian H. Bishop, are husband and wife, residents of Bradenton, Florida. For the years here involved they filed their income tax returns with the collector of internal revenue for the district of Florida. They have no children or other lineal descendants.
By an irrevocable indenture of trust entered into on December 28, 1935, petitioner Edward E. Bishop transferred to the First National Bank of Tampa, Florida, as trustee, certain securities. Under this trust the entire net income was payable to petitioner Lillian H. Bishop for life in the uncontrolled discretion of the trustee. The instrument provided: ‘The said Trustee is expressly given complete and full discretion to determine what part, if any, of the net income of this trust it will pay over‘ to the beneficiary ‘and when it, in its uncontrolled discretion, will pay such portions‘ of the net income to the beneficiary. On the death of Lillian H. Bishop, the net income in certain proportions is payable in the uncontrolled discretion of the trustee to Elizabeth B. Crawford, her son, James W. Crawford, Jr., and upon the latter's death to his widow and issue, should any survive him, during the minority of the issue, with remainder to such issue in fee simple. Income not distributed to the beneficiaries was to be invested and become part of the corpus. In lieu of all these provisions for remainder after the death of Lillian H. Bishop, she was given a general testamentary power of appointment as follows:
(d) Should the said Lillian H. Bishop elect so to do, she may, in her last will and testament, direct the final disposition of the corpus of this trust and undistributed net income in the hands of the Trustee from and after the date of her death, in which event the direction of the said Lillian H. Bishop in her said last will and testament shall take the place of all of the above provisions for the disposition of the corpus and income of this trust, provided for after the death of the said Lillian H. Bishop.
In the event of the failure of petitioner Lillian H. Bishop to exercise the power of appointment and in the further event of the death of all the life beneficiaries without surviving issue of James W. Crawford, Jr., the grantor could call upon the trustee to pay over to him the corpus of the trust and any undistributed income free of trust. If, under such circumstances, the grantor made no demand of the payment to him of the corpus and undistributed income, the entire net income was to be used in the support of a local hospital. The instrument further provided:
C. In the event that due to illness or other extraordinary circumstances the current beneficiary shall have need of more funds than are provided by the current income from this trust, then upon a proper showing of such necessity the said Trustee, in its discretion, may make available to the current beneficiary from the corpus of this trust such funds as may have been shown so to be necessary; provided, however, that not more than 5 percent of the corpus of this trust shall be so distributable to said current beneficiary in any one year. The trustee shall be at liberty to make available to such beneficiary any income that it may not have distributed to a current beneficiary should such emergency arise, whether or not such income has been invested, without taking such income as part of that portion of the corpus of this trust distributable only in any one year.
The life beneficiary was given the right to change the trustee to any other corporate trustee and to make as many such changes of trustee as she might desire. Any changes in investments were to be made by the trustee only upon the approval of the life beneficiary.
At the same time on December 28, 1935, petitioner Lillian H. Bishop also established a trust with the First National Bank of Tampa, Florida, as trustee. The two trust agreements were identical with the exception that the name of Edward E. Bishop appeared as the first life beneficiary in the instrument created by his wife and he was therein given the general testamentary power of appointment. There was an agreement between the petitioners and the trustee, made outside the trust instruments and before their execution, that the trustee would pay the net income of each trust to the life beneficiary on the request of the latter.
The securities transferred to the trustee by Edward E. Bishop had at the time of the transfer a fair market value of $257,852.38. They consisted of:
+--------------------------------------------+ ¦ ¦Shares ¦ +-----------------------------------+--------¦ ¦Cheeseborough Manufacturing Co ¦114 ¦ +-----------------------------------+--------¦ ¦E. I. du Pont de Nemours & Co ¦200 ¦ +-----------------------------------+--------¦ ¦Ohio Oil Co preferred ¦495 ¦ +-----------------------------------+--------¦ ¦Standard Oil Export Corporation pfd¦378 ¦ +-----------------------------------+--------¦ ¦Standard Oil Co. of New Jersey ¦2,500 ¦ +--------------------------------------------+
The securities transferred to the trustee by petitioner Lillian H. Bishop had at the time of the transfer a fair market value of $254,073.25, and consisted of the following:
+--------------------------------------------+ ¦ ¦Shares ¦ +-----------------------------------+--------¦ ¦Standard Oil Export Corporation pfd¦396 ¦ +-----------------------------------+--------¦ ¦Ohio Oil Co. preferred ¦498 ¦ +-----------------------------------+--------¦ ¦Standard Oil Co. of New Jersey ¦3,000 ¦ +-----------------------------------+--------¦ ¦Youngstown Sheet & Tube Co. pfd ¦100 ¦ +--------------------------------------------+
Petitioners each filed in the year 1936 separate gift tax returns for the calendar year 1935 reporting the transfer of these shares and paid gift taxes thereon. No distributions either of income or principal have been made by the trustee under either trust agreement. The trustee filed separate fiduciary income tax returns for each trust for the years 1936 to 1941, inclusive, showing the income of each trust as being taxable to the trust and has paid income taxes accordingly, none of which has been refunded except a refund of $11 on the 1940 return of the Edward E. Bishop trust which resulted from a minor adjustment in the income of the trust for the year.
The petitioners were married on June 6, 1914. They were a devoted couple. In their 30 years of married life there has been scarcely a day a year when they have not been together. Both at the time of their marriage and at the time of the creation of the trusts each was independently wealthy. The amounts transferred to the trusts constituted only a small part of their respective estates.
Shortly after their marriage petitioners met James W. Crawford and his wife, with whom they became very friendly. In 1924 a son was born to the Crawfords. Having no children of their own, the petitioners have treated the Crawfords' son, James W. Crawford, Jr., as their own child. Petitioners' motives in setting up the trusts, in addition to any tax motives, were twofold. They wished to provide for the Crawfords' son, but they also wanted to protect each other should the remote possibility of their being in need of money arise. The trusts were a sort of insurance for each other against their making bad investments with the bulk of their wealth.
Prior to creating these trusts petitioners discussed such action with each other and with their attorney and a representative of the trust company. Both trusts were executed at the same time and place.
During the years 1938, 1939, and 1940 Edward E. Bishop expended $229, $229, and $297, respectively, for statistical services consisting of subscriptions to business services used by him in the management and conservation of his investments. In his income tax returns for 1938, 1939, and 1940 he reported as dividends received $65,798.59, $63,336.31, and $75,529.40, respectively. In each of those same years he paid $70 in accountant's fees for the making of his income tax returns and the checking of his account books solely for the purpose of making those tax returns. During those years he had no tax-exempt income.
OPINION.
HILL, Judge:
The respondent contends that the undistributed income of these trusts was taxable to the petitioner-life beneficiaries under section 22(a) of the Revenue Act of 1938 and the Internal Revenue Code, and also under sections 166 and 167, as reciprocal trusts.
Each of the petitioners, independently wealthy so that the approximately $250,000 in securities conveyed in trust by each was but a small part of his or her estate, was made the first life beneficiary of the trust created by the other. Each petitioner was likewise given a general testamentary power of appointment over the corpus. The corporate trustee was given ‘complete and full discretion to determine what part, if any, of the net income‘ it would pay to the life beneficiary and ‘when it, in its uncontrolled discretion, will pay such portions‘ of the net income to the beneficiary. No criteria whatsoever were set forth in the trust instruments on which the trustee was to act. Lillian H. Bishop testified that the reason her spouse was given a life estate was because she did not want Crawford to get control of the funds should Mrs. Crawford predecease him. She testified that there was an understanding with the trustee that when Bishop requested the net income to be paid to him the trustee would so pay it, for the use of the Crawfords. Edward E. Bishop, on the other hand, was more frank, we think, in testifying at one point that one of his motives in creating the trust ‘was to, by the remotest stretch of the imagination that Mrs. Bishop would ever need anything, maybe that would be there.‘ On cross-examination he testified that many of his friends had lost money through bad investments and admitted that one of his considerations in setting up the trust was that he ‘felt that as a very faint possibility that Mrs. Bishop signing away, or something, her own, that she would have the use of that little * * * .‘ From this testimony we find that there was an agreement with the trustee that it would pay the net income of the trust to the life beneficiary on the request of that beneficiary and that this was not merely to be paid for the benefit of the Crawfords, but for the benefit of the life beneficiary himself. Furthermore, this view is buttressed by the fact that each life beneficiary was given the right at any time to change the trustee to any other corporate trustee. Thus, the corporate trustee was placed under the control of the life beneficiary and since there were no criteria set forth in the trust instrument as to when and what part, if any, of the trust income it should pay to the life beneficiary there could be no breach of trust in its acceding to the wishes of the life beneficiary. Nor would the trustee have anything to go on in making its decision as to whether it should distribute or accumulate the income, other than such a request by the life beneficiary.
We can view the confluence of provisions (1), that the trustee shall have complete discretion as to when and whether it shall pay the net income to the life beneficiary with no criteria or tests laid down on which it shall pass its judgment, and (2), that the life beneficiary may remove the trustee at will and appoint a new corporate trustee as often as he desires, in no other light than as being a means of bringing about the result that would be reached had the trust instrument provided that net income shall be payable by the trustee to the life beneficiary on the request of the latter. These provisions may be used to enforce what we have found to be the understanding outside of the trust instrument between the trustee and the petitioners and would serve in the place of such an understanding with a new trustee should the beneficiary ever see fit to change trustees. Since these provisions are more than they appear to be, we consider actualities only, regarding the substance rather than the form. United States v. Phellis, 257 U.S. 156, 168.
In Richardson v. Commissioner, 121 Fed.(2d) 1, it was held that a trustee who had the power to revoke and take for himself the corpus of a long term trust created by his wife for the benefit of their children was personally taxable on the income thereof under section 22(a), although he did not exercise his power to terminate the trust and never used any of the income for his own benefit. To like effect was Jergens v. Commissioner, 136 Fed.(2d) 497; certiorari denied, 320 U.S. 784, where the taxpayer was not the grantor but the trustee and had the power to alter or amend the trust instrument and to withdraw the trust corpus. The court there said:
In Section 22(a) of the respective Revenue Acts here applicable, Congress intended to use the full measure of its taxing power. * * * It is the long-settled course of tax jurisprudence that such control over income warrants the imposition of the tax incidence of that income upon the person who commends its disposition whether he takes it for himself or not.
This principle is not to be limited in trust cases to situations where the grantor has retained controlling powers; the determinative consideration is the existence of actual dominion over the property whether it is retained or acquired. * * *
Section 23(a)(2) was added by section 121 of the Revenue Act of 1942 and was made retroactive by section 121(d) and (e) of that act. It reads as follows:‘SEC. 23. DEDUCTIONS FROM GROSS INCOME.‘In computing net income there shall be allowed as deductions:‘(a) EXPENSES.—‘(2) NON-TRADE OR NON-BUSINESS EXPENSES.— In the case of an individual, all the ordinary and necessary expenses paid or incurred during the taxable year for the production or collection of income, or for the management, conservation, or maintenance of property held for the production of income.‘
In Edward Mallinckrodt, Jr., 2 T.C. 1128; affd., 146 Fed.(2d) 1, the taxpayer was cotrustee with a trust company of a trust created by his father. The remainder of the net income after payment of $10,000 per year to taxpayer's wife was payable to taxpayer upon his request. All net income not so paid was to accumulate and become part of the principal. Taxpayer was given a general testamentary power of appointment over the remainder, which was to go to his wife, children, or other descendants should he fail to exercise the power. Subject to the approval of both trustees upon the request of taxpayer, the trustees might pay taxpayer during his lifetime such portion of the principal as might seem wise to the trustees to distribute to taxpayer for his benefit or that of his family. Taxpayer was given power to appoint a successor trustee. The trustees had power to terminate the trust during the lifetime of the taxpayer for any reason which would be to the interest of the estate or the beneficiaries and thereupon to transfer the assets to taxpayer. The trustees had broad powers of management. Taxpayer never exercised his right to take trust income. In holding that the income was taxable to the taxpayer, we said:
* * * The fact that the powers and rights are not the retained powers and rights of a grantor but were received by petitioner as beneficiary of the trust and by grant from his father makes them no less substantial. As in the Clifford case (309 U.S. 331) the rights and powers of the petitioner in and to the trust corpus and the income therefrom did not include all of the incidents of ownership, but we think it may definitely be said that the benefits held by and belonging to petitioner, directly or indirectly, were such as to require the conclusion that he was the owner of the income here in question, within the meaning of section 22(a) supra. * * *
In affirming the opinion of the Tax Court, the Circuit Court of Appeals for the Eighth Circuit 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, Helvering v. Clifford, 309 U.S. 331, 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 Fed. (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 339 U.S.); Helvering v. Gordon, 8 Cir., 87 Fed. (2d) 663, 667.
The Circuit Court evidently did not rely on the taxpayer's right to revoke the trust, but rather observed that the grantor intended the taxpayer's wife and descendants to have a real interest in the income and corpus of the trust estate. The court said:
* * * It is a fair assumption that the grantor contemplated that petitioner would not, during his lifetime seek to withdraw either income or principal from the trust estate unless he needed it or unless he believed that it could be used advantageously by him for the benefit of the family.
In the establishment of these trusts petitioners have received from each other all the incidents of ownership that were of importance to them. Under the trust created by Edward E. Bishop, petitioner Lillian H. Bishop has the right to the net income for life should she choose to request it. She may change the trustee to any corporate trustee at will and make as many successive changes as she desires. She must be consulted on any changes in investments and, in view of her power to change the trustee, this becomes more than a mere consultative right. If in the event of ‘illness or other extraordinary circumstances‘ she should have need of more funds than are provided by the current income then the trustee may, in its discretion, pay to her up to 5 percent a year of the corpus of the trust and any part of the income not already distributed. She also has a general testamentary power of appointment over the corpus of the trust.
Under the trust created by Lillian H. Bishop, petitioner Edward E. Bishop has the same powers and rights. We have here a situation where a devoted husband and wife, each independently wealthy, have reallocated their income between themselves in such a way as (1) to retain all the incidents of ownership that were of importance to them and, (2) at the same time if successful, to remove the income on $500,000 of their fortunes from the high tax brackets into which it would otherwise fall. All the provisions in remainder for the Crawfords are subject to revocation by each of the petitioner-life beneficiaries and each can convey by will approximately the same amount and type of securities that he could have so conveyed before executing his trust.
Each petitioner-life beneficiary has the power to have the income distributed or accumulated. During the years here involved the income was being accumulated subject to the demand of the life beneficiaries, and if not demanded during their lifetime they have the power by will to dispose of both the income and corpus. All that each petitioner lacks as to complete ownership of the fund created for him is the power to dispose of the principal during his life. But since the principal is but such a small part of the wealth of each of the petitioners and since they felt that they would only want the principal during life in an extraordinary circumstance, the giving up of that incident of ownership may not be said to preclude them from being the owners of the income under section 22(a).
We have found it unnecessary to consider the second argument of the respondent that each of these trusts was created by the petitioner-life beneficiary thereof under the doctrine of reciprocal trusts and that the income thereof was taxable to him under sections 166 and 167, supra.
Since our opinion does not rest upon the proposition that the transfers in trust were not gifts, the question as to whether we have jurisdiction over the gift taxes paid for the year 1935 is not before us, but in any event that question has been answered in the negative. Commissioner v. Gooch Milling & Elevator Co., 320 U.S. 418; Robert G. Elbert, 2 T.C. 892.
The sums of $229, $229, and $297 expended by petitioner Edward E. Bishop during the years 1938, 1939, and 1940, respectively, for statistical services used by him in the management and conservation of his investments are deductible as nonbusiness expenses under section 23(a)(2) of the Internal Revenue Code.
Petitioner conceded that the $70 spent in each of those years for accountant's fees in the making of his income tax returns is not deductible.
Reinecke v. Northern Trust Co., 278 U.S. 339; Corliss v. Bowers, 281 U.S. 376; Lucas v. Earl, 281 U.S. 111; Helvering v. Clifford, 309 U.S. 331; Helvering v. Horst, 311 U.S. 112; Harrison v. Schaffner, 312 U.S. 579.
Decisions will be entered under Rule 50.