Opinion
Docket Nos. 111206 112149.
1944-04-14
GEORGE F. BOOTH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Phillips Ketchum, Esq., and Robert S. Bowditch, Esq., for the petitioner. James T. Haslam, Esq., for the respondent.
Income from trust created by petitioner for his wife and applied by her without his direction or control to payment of insurance premiums on his life, held, not taxable to him. Henry A.B. Dunning, 36 B.T.A. 1222, distinguished. Phillips Ketchum, Esq., and Robert S. Bowditch, Esq., for the petitioner. James T. Haslam, Esq., for the respondent.
These consolidated proceedings seek a redetermination of deficiencies in petitioner's income tax for the calendar years 1938, 1939, and 1940, in the amounts of $10,393.84, $13,266.19, and $14,292.10, respectively. Amendments to the answers sought to increase the deficiencies for 1939 and 1940 by $7,578.21 and $7,709.39, respectively. A part of the deficiency determined for 1939 was based on the disallowance by respondent of a demolition loss deduction. Petitioner has conceded the correctness of that action.
The question presented is whether the income from a certain trust or any part thereof is taxable to petitioner under either section 22(a) or section 167(a)(3) of the Revenue Act of 1938 and of the Internal Revenue Code.
FINDINGS OF FACT.
The parties have stipulated certain of the facts, which we hereby find accordingly. Facts otherwise found form the record and a summary of the stipulated facts are as follows:
The petitioner, George F. Booth, is an individual, with his principal residence in Worcester, Massachusetts. For the years 1938, 1939, and 1940 he filed his income tax returns with the collector of internal revenue for the district of Massachusetts and in none of those years did he include as part of his income any part of the income from a certain trust, hereinafter referred to as the securities trust.
In 1927, upon the application of petitioner, the Mutual Benefit Life Insurance Co. issued policies on his life in the amount of $70,000. Originally his wife, Minnie Wells Booth, was named beneficiary of these, while petitioner retained a power to change the beneficiary. Subsequently this power was exercised and on the date of the creation of certain trusts, hereinafter referred to as the insurance trusts, these policies were payable to the executors, administrators, and assigns of petitioner, and were subject to loans of $7,162.40.
In 1931, when petitioner was 60 years of age, his property consisted of assets having a cost to him of $69,097, the insurance policies previously described, and 5,000 shares of stock in the Worcester Telegram Publishing Co. Petitioner was the editor and publisher of newspapers published by that company. In 1931 it had outstanding $640,000 of bonds out of an original issue of $800,000. Petitioner's stock in the Publishing Co. gave him a one-third interest therein, the other two-thirds being held by one other stockholder. In the same year petitioner had personal debts of $140,500.
Petitioner then felt that if he should die leaving his financial affairs in that condition it might necessitate the sale of some of the stock in the Publishing Co.— a development which he wished to avoid. He therefore wanted an additional $100,000 of life insurance to have more cash available to his estate in case of his death. His wife made an application for additional insurance on petitioner's life. Policies totaling $300,000 were offered to petitioner. At first he was inclined to accept only $100,000 coverage, but after some time he decided that since he could afford to carry the additional $300,000 he would do so. On the application of petitioner's wife, the Prudential Life Insurance Co. of America issued in January and April 1931 policies on the life of petitioner totaling $300,000. Originally petitioner's wife was the beneficiary of all the policies, with all the rights, benefits, and advantages of the insurance, but by an endorsement dated December 14, 1931, ‘she assigned * * * all her rights, benefits and advantages * * * to the petitioner,‘ to quote the language of the stipulation.
By 1935 petitioner's financial position had changed. He had reduced his personal indebtedness by $75,500 to bring it down to a total of $65,000. The Publishing Co. had retired all of the $640,000 of bonds previously described. Besides his stock in the Publishing Co. and his insurance policies, petitioner then owned other securities costing $48,000.
In 1935 petitioner had three children, Robert, single, age 20, who lived at home with petitioner and his wife; a married daughter, Doris, age 37, who had a separate home; and a married son, Howard, age 35, who also had a home apart from petitioner's.
On February 25, 1935, petitioner created the securities trust for the benefit of his wife and children. He transferred to himself as trustee 2,000 shares of stock in the Publishing Co. to hold pursuant to the terms of the written trust declaration. Title to the shares was transferred to petitioner as trustee on the books of the company. The 2,000 shares referred to had been among the 5,000 owned by petitioner, who continued to hold individually the remaining 3,000. The trust by its terms was irrevocable. It provided that the trustee was to pay the income therefrom to petitioner's wife for life and on her death, petitioner living, the trustee was to divide the trust income and pay it equally among the children of petitioner and his wife or surviving issue of such children, and on the death of the survivor of petitioner and his wife, the trustee was to divide the trust property into two equal parts and pay one part to each of the petitioner's surviving sons, with remainders over in case of default.
The trustee was given the following powers:
In addition to any and all other powers given the trustee hereunder or by law and without in any way intending to limit the same, such power shall include the following:
(a) To sell from time to time any part or all of the trust property upon such terms and conditions as he may think wise and no purchaser shall be responsible for the application of the purchase money.
(b) To continue to hold as an investment the securities transferred to him at the time of the execution of this trust and also any other property which may be conveyed to him as trustee hereunder for such period of time as the trustee in his absolute discretion may desire and he shall not be responsible for any loss which may result thereby, notwithstanding the fact that such securities may not be proper investments for trustees.
(c) To participate, if he deems proper, in any reorganization, merger or consolidation affecting the trust property, and to continue to hold such property as he may receive upon such reorganization, merger or consolidation for such period of time as he desires without liability for any loss which may result thereby.
(d) To invest and reinvest any funds which he may have in such securities as he in his absolute discretion may deem proper, it being the intention hereof that he shall not be restricted in his investments of cash received by him to such securities as are required to be held by trustees and savings banks under the laws of the Commonwealth of Massachusetts, but it being expected that he will invest such cash in securities which are considered fairly conservative. Nothing herein, however, shall be construed to make the trustee liable by reason of his continuing to hold any securities transferred to him or received by him on any merger, reorganization or consolidation.
The income of the securities trust during the years in question was as follows:
+---------------------------------------+ ¦ ¦ ¦Massachusetts¦ ¦ +----+---------+-------------+----------¦ ¦ ¦ ¦taxes ¦ ¦ +----+---------+-------------+----------¦ ¦ ¦Income of¦assessed ¦ ¦ +----+---------+-------------+----------¦ ¦Year¦trust ¦and paid ¦Net income¦ +----+---------+-------------+----------¦ ¦ ¦ ¦by trust ¦ ¦ +----+---------+-------------+----------¦ ¦1938¦$20,000 ¦$1,848 ¦$18,152 ¦ +----+---------+-------------+----------¦ ¦1939¦35,000 ¦1,380 ¦33,620 ¦ +----+---------+-------------+----------¦ ¦1940¦35,000 ¦2,310 ¦32,690 ¦ +---------------------------------------+ Petitioner's wife reported the net income as her income for Federal income tax purposes in those years. The source of all the income was dividends on the stock in the Publishing Co. Dividend checks were made payable to George F. Booth, trustee, and all but small amounts of the income which were left in a bank account in the trustee's name were paid over from time to time to Mrs. Booth. As the money was distributed to her she deposited it in her own bank account in the Mechanics National Bank of Worcester, on which account she alone had the power to draw.
At the time the securities trust was created petitioner filed a Federal gift tax return reporting the transfer of the property to the trust and paid a gift tax thereon. In that return he stated that the object of the gift was ‘to provide separately for my wife, Minnie Wells Booth, during her life.‘
The cost of running petitioner's household, including all expenses of maintaining his wife for the years 1938-1940, inclusive, ranged from $11,500 to $13,500 annually. Petitioner supplied all of these sums and his wife used none of the income from the securities trust for household or her personal living expenses.
On August 14, 1935, petitioner created three life insurance trusts, which were in force during the years 1938-1940 in the same form in which they were executed. In creating these trust petitioner assigned to the trustees of each certain insurance policies on his life, and provided that the trustees were not to pay the premiums on the same ‘from any funds transferred to the trust by the grantor and shall be under no obligation to see that said premiums are paid. ‘ The three trusts were irrevocable and they consisted solely of $370,000 of policies in fact amount— $70,000 taken out in 1927 and $300,000 taken out in 1931, as previously described.
One insurance trust was for the benefit of petitioner's daughter, Doris. Its terms provided that the trustees were to hold the policies until the death of the grantor, then to collect the proceeds and invest them. The income was to be paid to Doris for life and on her death the remainder was to go to her husband and their children or surviving issue of such children. One of the other two trusts was for each of the two sons of petitioner and their terms were the same as the terms of the trust for Doris, except that the trustees were authorized to pay income principal of each trust to petitioner's wife if she survived him and in the opinion of the trustees her income from the securities trust and another trust to be created by petitioner's will was insufficient for her support and maintenance.
From August 14, 1935, through the years in question the trustees of each insurance trust have been Harry G. Stoddard, Frank C. Smith, and Howard M. Booth, except for the period from August 15, 1935, to September 9, 1935, when Frank C. Smith had not yet qualified to act as cotrustee.
At the time the insurance trusts were created petitioner filed a Federal gift tax return covering the assignment of the policies and paid a gift tax thereon. In the gift tax return petitioner stated that the policies on August 14, 1935, had a total cash surrender value of $51,231.25. If the policies had been exchange on that date for paid-up policies, the face value thereof after payment of the outstanding loans from the proceeds of the policies would have been $73,823.
The policy number, trust to which assigned, face amount, and premium for each of the policies issued by the Prudential Life Insurance Co. of America were as follows, for the years 1938, 1939, and 1940:
+-----------------------------------------------------------------------+ ¦ ¦ ¦ ¦Premiums ¦ +-------+---------------------+-----------+-----------------------------¦ ¦Policy ¦ ¦ ¦ ¦ ¦ ¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦number ¦Assigned to trust b/o¦Face amount¦ ¦ ¦ ¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦ ¦ ¦ ¦1938 ¦1939 ¦1940 ¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦7204963¦Doris ¦$100,000 ¦$5,764.00¦$5,764.00¦$5,764.00¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦7204964¦Howard ¦50,000 ¦2,882.00 ¦2,882.00 ¦2,882.00 ¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦7204965¦Doris ¦73,000 ¦4,207.72 ¦4,207.72 ¦4,207.72 ¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦8993675¦Robert ¦14,500 ¦835.78 ¦835.78 ¦835.78 ¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦8993676¦Howard ¦12,500 ¦720.50 ¦720.50 ¦720.50 ¦ +-------+---------------------+-----------+---------+---------+---------¦ ¦8993677¦Robert ¦50,000 ¦2,882.00 ¦2,882.00 ¦2,882.00 ¦ +-----------------------------+-----------+---------+---------+---------¦ ¦Total ¦300,000 ¦17,292.00¦17,292.00¦17,292.00¦ +-----------------------------------------------------------------------+
Similar information, but including interest paid on loans, is as follows for policies issued in 1927 by the Mutual Benefit Life Insurance Co.:
+-----------------------------------------------------------------------------+ ¦ ¦ ¦Premiums ¦ +---------+----------------------------+--------------------------------------¦ ¦Policy ¦ ¦ ¦ ¦ ¦ ¦ +---------+----------------------------+--------+---------+---------+---------¦ ¦number ¦Assigned to trust b/o ¦Face ¦ ¦ ¦ ¦ ¦ ¦ ¦amount ¦ ¦ ¦ ¦ +---------+----------------------------+--------+---------+---------+---------¦ ¦ ¦ ¦ ¦1938 ¦1939 ¦1940 ¦ +---------+----------------------------+--------+---------+---------+---------¦ ¦1314690 ¦Howard ¦$15,000 ¦$790.05 ¦$785.10 ¦$782.10 ¦ +---------+----------------------------+--------+---------+---------+---------¦ ¦1314691 ¦Doris ¦20,000 ¦1,053.40 ¦1,046.80 ¦1,042.80 ¦ +---------+----------------------------+--------+---------+---------+---------¦ ¦1314692 ¦Robert ¦15,000 ¦1,060.20 ¦1,053.40 ¦788.25 ¦ +---------+----------------------------+--------+---------+---------+---------¦ ¦1315392 ¦Doris ¦20,000 ¦795.15 ¦790.05 ¦1,051.00 ¦ +--------------------------------------+--------+---------+---------+---------¦ ¦Total ¦70,000 ¦3,698.80 ¦3,675.35 ¦3,664.15 ¦ +--------------------------------------+--------+---------+---------+---------¦ ¦Interest on loans ¦_ ¦429.74 ¦429.74 ¦429.74 ¦ +--------------------------------------+--------+---------+---------+---------¦ ¦Totals of premiums on all 10 policies ¦ ¦21,420.54¦21,397.09¦21,385.89¦ ¦and interest ¦ ¦ ¦ ¦ ¦ +-----------------------------------------------------------------------------+
Petitioner's wife drew checks on her account in the Mechanics National Bank of Worcester and paid therewith during the years 1938, 1939, and 1940 the premiums on the $370,000 of life insurance policies contained in the three trusts and interest on loans secured thereby in the amounts shown.
Sometime during the year before the securities trust was created petitioner conceived the idea of creating a trust for his wife. The intent of petitioner in creating the trust was to provide separately for his wife during her life. It was also his intent that he would continue to pay all the household expenses and all his wife's personal expenses, and that his wife would not use the income from the trust, but would accumulate it to build up an estate of her own. At about the time the securities trust was established there was a family understanding that petitioner's wife would accumulate the income from the trust.
At the time the securities trust was established petitioner had no thought that the income from it would be used to pay the premiums on the insurance policies on his life. At that time he said nothing to his wife about insurance premiums.
In August 1935 petitioner was carrying over $400,000 of insurance on his own life, including the previously noted $370,000 face amount of policies. At that time he felt that he was overinsured in the light of changes in his financial circumstances which had occurred since 1931. He talked to the auditor of the Publishing Co., his confidential secretary, and his wife about dropping some of the policies. He had certain other insurance besides the $370,000 of policies taken out in 1927 and 1931, and, while he was willing to keep that up, he wanted to exchange the $370,000 for paid-up insurance.
The auditor of the Publishing Co. with whom petitioner had discussed his insurance problem suggested an arrangement whereby the $370,000 of policies might be put in trust and petitioner's wife pay the premiums on them out of the income she received from the securities trust. Petitioner discussed the plan with his wife and she rather liked it. She told him that she would pay the insurance premiums, and he told her that that was agreeable to him. He thereupon created the insurance trusts. At that time neither petitioner nor his wife felt that her participation in the plan was inconsistent with the original understanding relative to the securities trust.
Economic gain was not realized or realizable by petitioner under the provisions of the securities trust. The rights and powers reserved to petitioner as trustee under the trust indenture did not constitute the equivalent of ownership of the trust corpus or income.
OPINION.
OPPER, Judge:
Respondent's view of the facts as set forth in his brief ‘may be summarized as follows: Petitioner * * * did not propose to continue premium payments, but his wife, not wishing to lose the benefit of past premium benefits * * * proposed to pay the premiums with income from the securities set aside for her. That proposal had his approval.‘
This statement of the operative facts seems to us on its fact to distinguish the present proceeding from Henry A. B. Dunning, 36 B.T.A. 1222. The trust income in that case was held taxable to the husband grantor on evidence that he ‘suggested‘ its use for the payment of insurance premiums. In the view respondent himself takes of the petitioner's wife. It was her income, as beneficiary of the trust already established for her by petitioner, that was involved in the decision. See Frederick K. Barbour, 39 B.T.A. 910; reversed on other grounds (C.C.A., 2d Cir.), 122 Fed.(2) 165; certiorari denied, 314 U.S. 691. That she should be the one to make the choice as to its disposition is thus neither surprising nor at odds with the assumption that the income was hers and not his. Cf. W. C. Cartinhour, 3 T.C. 482.
The most that can be said is that the wife's course of action met with petitioner's approval. The evidence makes it clear that petitioner would have been equally satisfied with the opposite course. That is far from establishing the ‘control‘ which the Dunning case found to exist by reason of the acquiescence of the wife in the suggestion of the husband. There are many cases where a wife similarly situated has voluntarily defrayed some part of the family expenses. E. g., Ralph L. Gray, 38 B.T.A. 584; Edward D. Graff, 40 B.T.A. 920, 922; affd. (C.C.A., 7th Cir.), 117 Fed.(2d) 247. It is difficult to believe that this could have been done without the consent and approval of the husband. Yet in none of them, so far as can be discovered, has that voluntary and undirected conduct of the wife resulted in attributing trust income to the grantor husband, particularly where the income is as clearly the unqualified property of the wife as it is here.
Absent that ‘control,‘ there is nothing to characterize this as a ‘Clifford‘ trust. The powers retained by petitioner as trustee were inconsiderable compared even with such cases as Commissioner v. Branch (C.C.A., 1st Cir.), 114 Fed.(2) 985. His voice in the corporate affairs of the company by which he was employed was not materially increased by his influence as custodian of the trust's stock. Cf. Helvering v. Stuart, 317 U.S. 154, 169; John Stuart, 2 T.C. 1103; Murphy Shannon Armstrong, 1 T.C. 1008. And the indeterminate period of the trust suggests a release of the grantor's ownership which other aspects of control, not to be found here, are necessary to rebut. Helvering v. Elias (C.C.A., 2d Cir.), 112 Fed.(2d) 171; certiorari denied, 314 U.S. 692. We take the view that respondent's determination was in error.
Decisions will be entered under Rule 50.