Opinion
Docket No. 12167.
1948-01-12
FERDINAND A. BOWER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert J. Bird, Esq., for the petitioner. Philip J. Wolf, Esq., for the respondent.
The petitioner, a man of wealth, set up an irrevocable trust providing income for named beneficiaries, his wife, brothers, and sisters, undistributed income to become corpus. Administrative powers over the corpus of the trust were not reserved to him, and a bank was trustee and he could not secure either income or corpus; but the income and principal were to be distributed only according to his written directions. Later, though authority to amend was not contained in the trust instrument, petitioner and the trustee amended the instrument to provide for distribution to the issue of all beneficiaries, and in the taxable year some income was distributed to some of petitioner's nieces. At the petitioner's death income and principal could be made distributable to petitioner's estate, and trust assets were subject to his debts at death. Held, the petitioner is taxable upon the trust income, under section 22(a) of the Internal Revenue Code. Robert J. Bird, Esq., for the petitioner. Philip J. Wolf, Esq., for the respondent.
This proceeding involves a deficiency of $8,486.02 in income tax for the year 1941. The issue is whether the income of a trust created by petitioner is taxable to him under the provisions of section 22(a) of the Internal Revenue Code. The stipulation of facts filed by the parties is incorporated by reference as part of the findings of fact. Portions thereof necessary for consideration of the issue are set forth in the findings of fact made from other evidence.
FINDINGS OF FACT.
The petitioner, an individual residing in Flint, Michigan, filed his income tax return for the taxable year with the collector for the district of Michigan.
On December 31, 1940, the petitioner, as settlor, entered into a written agreement with the National Bank of Flint, Michigan, a national banking association, as trustee, referred to herein for convenience as trust No. 189, under the terms of which 2,000 shares of class A stock of G. M. Shares, Inc., were conveyed to the trustee, irrevocably in trust for the purposes set forth therein. The trust agreement provided, among other things, that the trustee should ‘hold, manage, care for and protect the trust fund in accordance with its best judgment and discretion‘; that the trustee might sell or exchange the securities or any securities thereafter deposited by the settlor, as it deemed advisable; and that, subject to the provisions thereof, the trustee should invest and reinvest any cash in the trust fund in such securities as in the judgment of the trustee were sound and suitable for trust investment, and should have full power to sell and convey trust property for such prices and on such terms as it saw fit.
The trust fund was to continue ‘for the use and benefit, and during the lives ‘ of the settlor's wife and designated brothers and sisters of the settlor named as beneficiaries, ‘as follows: During the lifetime of the Settlor, the Trustee shall pay such portions of the income from, and principal of, the trust fund to such of the above named beneficiaries as the Settlor may from time to time direct in writing. Any unexpended income from the trust fund shall be accumulated and invested with the principal thereof.‘ The named beneficiaries, their relation to the settlor, date of birth, and place of residence were as follows:
+--------------------------------------------------------------+ ¦Name ¦Relation to settlor¦Date of ¦Residence ¦ +-----------------+-------------------+----------+-------------¦ ¦ ¦ ¦birth ¦ ¦ +-----------------+-------------------+----------+-------------¦ ¦Agnes M. Bower ¦Wife ¦4-24-1886 ¦Flint, Mich. ¦ +-----------------+-------------------+----------+-------------¦ ¦Augustin A. Bower¦Brother ¦7- 6-1873 ¦Oil City, Pa.¦ +-----------------+-------------------+----------+-------------¦ ¦Frank H. Bower ¦Brother ¦9- 3-1875 ¦Tarentum, Pa.¦ +-----------------+-------------------+----------+-------------¦ ¦Caroline Bower ¦Sister ¦1- 8-1878 ¦Oil City, Pa.¦ +-----------------+-------------------+----------+-------------¦ ¦Frances R. Bower ¦Sister ¦4-14-1980 ¦Oil City, Pa.¦ +-----------------+-------------------+----------+-------------¦ ¦Edward J. Bower ¦Brother ¦8-21-1885 ¦Oil City, Pa.¦ +-----------------+-------------------+----------+-------------¦ ¦Andrew M. Bower ¦Brother ¦10-23-1887¦Oil City, Pa.¦ +-----------------+-------------------+----------+-------------¦ ¦Mary C. Breene ¦Sister ¦6- 4-1890 ¦Oil City, Pa.¦ +-----------------+-------------------+----------+-------------¦ ¦Joseph T. Bower ¦Brother ¦10- 8-1895¦Peoria, Ill. ¦ +--------------------------------------------------------------+
Some of the other provisions of the trust instrument read as follows:
5. (b) Upon the death of the Settlor, this trust fund shall be administered in conjunction with the trust agreement between the said Settlor and the said Trustee dated the sixth day of October, A.D. 1934 as amended, known as Trust No. 79, and distributed in accordance with the specific terms of Section 5(d)-(1), (2), (3), (4), (5), (6), (7), (8), (e)-(1), (2), (3), (4), (5), (6), (7), (f), (g) and (h) of said trust agreement as amended on the sixteenth day of July, A.D. 1940 and any future amendments thereto. Upon the final distribution of this trust fund in accordance with the provisions of said trust agreement, this trust shall likewise terminate.
6. In construing the provisions of Section 5(b) in said trust agreement as amended on the sixteenth day of July, A.D. 1940 and any future amendments thereto, the assets of this trust, known as Trust No. 189, shall be considered in conjunction with the assets of Trust No. 78 and Trust No. 79. It is the Settlor's intention that Trust No. 78, 79 and 189 shall each pay the percentage of the Settlor's debts and taxes which the total of said debts and taxes bears to the market value of the assets in each trust on the date of the Settlor's death, taking into consideration any life insurance proceeds which may be used for this purpose.
On October 6, 1934, the petitioner had created two trusts, known, respectively, as trust No. 78 and trust No. 79, in each of which the National Bank of Flint was named trustee. The trusts, as amended on July 16, 1940, authorized the trustee to manage the trust funds in accordance with its best judgment and provided for payment of funeral expenses and debts of the settlor, and succession, estate, and inheritances taxes against the estate and the trusts, out of trust funds. The settlor reserved the power to revoke the trusts on 30 days written notice and to modify them at any time, except that provisions respecting the duties, powers, compensation, and liability of the trustee could not be altered without the written consent of the trustee.
Section 5(d)(1) to (8), inclusive, of trust No. 79, as amended on July 16, 1940, provided that upon the death of the petitioner the balance of the net income of the trust should be paid to the settlor's brothers and sisters, or to their surviving issue, in certain specified amounts. Section 5(e)(1) to (7), inclusive, of the same trust, as amended on July 16, 1940, provided for the termination of the trust upon the death of the last survivor of the settlor, his wife, and his brothers and sisters, and the distribution of the balance in the trust fund to children of certain of his brothers and sisters, or, if deceased, to their issue, and Villanova College. Trust No. 79 was not amended after July 16, 1940, and was revoked on April 8, 1942.
On January 28, 1940, petitioner transferred an additional 2,000 shares of G. M. Shares, Inc., class A stock to trust No. 189.
The trust was created by petitioner for the purpose, among others, of establishing a fund out of which he could distribute to his less fortunate brothers and sisters, all of whom were in good health, money over a period of years as they required it. Their requirements for financial assistance differed and petitioner was in a better position than the trustee to determine when they needed such help and the amount thereof.
The settlor intended to name issue of his brothers and sisters as beneficiaries of trust No. 189, but they were overlooked when the trust was created. The oversight was ascertained after the death of one of petitioner's brothers. Without the issue of the settlor's brothers and sisters as beneficiaries, the trust would not serve all of the purposes for which it was intended. Thereafter, on May 31, 1941, the settlor and the trustee executed an instrument amending the trust to include issue of the named beneficiaries as additional beneficiaries.
The principal asset of G. M. Shares, Inc., a holding company, consisted of shares of common stock of General Motors Corporation. G. M. Shares, Inc., had the following classes of shares of stock outstanding on the dates shown:
+-----------------------------------+ ¦ ¦Dec. 31, 1940¦Dec. 31, 1941¦ +-------+-------------+-------------¦ ¦ ¦Shares ¦Shares ¦ +-------+-------------+-------------¦ ¦Common ¦50,000 ¦50,000 ¦ +-------+-------------+-------------¦ ¦Class A¦1,674,344 ¦1,636,005 ¦ +-------+-------------+-------------¦ ¦Class B¦390,210 ¦354,566 ¦ +-----------------------------------+
Excluding the 2,000 shares transferred to trust No. 189 on December 31, 1940, petitioner controlled 175 shares of common, 31,000 shares of class A, and 2,730 shares of class B stock of G. M. Shares, Inc., and his wife controlled 2,000 shares of the common. Exclusive of the total of 4,000 shares transferred by petitioner to trust No. 189 on January 28, 1941, and December 31, 1941, each controlled a like amount of the stock, except that petitioner controlled only 27,800 shares of the class A stock. Petitioner did not vote or give proxies to vote any of the stock he controlled.
During 1941 there were no transactions involving the securities or other property of trust No. 189, except as herein set forth.
During the taxable year the net income of trust No. 189 was $13,809.25, of which, at petitioner's direction, the trustee distributed the following amounts aggregating $10,171.90, to the individuals shown:
+---------------------------------------------------------------+ ¦Name ¦Relation to settlor ¦Amount ¦ +-----------------+------------------------------------+--------¦ ¦Augustin A. Bower¦Brother ¦$660.00 ¦ +-----------------+------------------------------------+--------¦ ¦Andrew M. Bower ¦Brother ¦515.00 ¦ +-----------------+------------------------------------+--------¦ ¦Frances R. Bower ¦Sister ¦900.00 ¦ +-----------------+------------------------------------+--------¦ ¦Caroline Bower ¦Sister ¦1,575.00¦ +-----------------+------------------------------------+--------¦ ¦Frank H. Bower ¦Brother ¦1,350.00¦ +-----------------+------------------------------------+--------¦ ¦Mary C. Breene ¦Sister ¦1,433.15¦ +-----------------+------------------------------------+--------¦ ¦Marie Breene ¦Niece--daughter of Mary C. Breene ¦1,100.00¦ +-----------------+------------------------------------+--------¦ ¦Ruth M. Breene ¦Niece--daughter of Mary C. Breene ¦1,756.25¦ +-----------------+------------------------------------+--------¦ ¦Mary C. Bower ¦Niece--daughter of Augustin A. Bower¦722.50 ¦ +-----------------+------------------------------------+--------¦ ¦Dorothy Bower ¦Niece--daughter of Augustin A. Bower¦60.00 ¦ +-----------------+------------------------------------+--------¦ ¦Helen Bower ¦Niece--daughter of Frank H. Bower ¦100.00 ¦ +---------------------------------------------------------------+
Amounts of money were given by petitioner to his brothers and sisters in 1940. The difference of $3,637.35 between net income and the total of the distributions in 1941 was reported in a fiduciary return filed by the trustee for trust No. 189 for the year 1941 as net income taxable to the fiduciary. In his determination of the deficiency the respondent held that the net income of trust No. 189 for the taxable year in the amount of $13,809.25 constituted taxable income of petitioner under the provisions of section 22(a) of the Internal Revenue Code.
During the taxable year petitioner was married and residing with his wife, who reported a net taxable income of $8,894.37 for such year, all of which was from her separate estate.
The National Bank of Flint had outstanding on December 31, 1940, and December 31, 1941, 20,000 shares of its stock, of which petitioner owned 1,487 shares and his wife owned 8 shares. Petitioner was not an officer of the bank; neither was he an officer of G. M. Shares, Inc., and he did not take an active part in meetings of stockholders of the corporation.
In his income tax returns for 1940 and 1941 the petitioner reported gross income of $121,178.24 and $109,426.92, respectively, including income of $119,930.06 and $107,674.92 in the respective years from trusts Nos. 78 and 79.
The petitioner has been retired since 1936 and has had no occupation since then except looking after his own interests.
The trustee of trust No. 189 went into voluntary dissolution in May 1942. On September 30, 1942, a state court discharged the trustee and appointed the Genessee County Savings Bank and successor trustee of the trust. The new trustee declined to recognize the amendment made to the trust on May 31, 1941. In 1944 or 1945 the trust was canceled, with the consent of the beneficiaries. The registrar of G. M. Shares, Inc., has never recognized the cancellation of the trust.
OPINION.
DISNEY, Judge:
The question here, as the parties agree, involves an application of the Clifford doctrine (Helvering v. Clifford, 309 U.S. 331) to the facts. The principal difference between them is their choice of cases interpreting the rule to support their contentions. The respondent starts with Commissioner v. Buck, 120 Fed.(2d) 775, and petitioner regards Hawkins v. Commissioner, 152 Fed.(2d) 221, as controlling.
In the Buck case the settlor, an individual with income in excess of his normal needs, directed the trustee, a bank, to pay the income of the trust to his wife, who had personal property worth more than $500,000 and owned the family residence, for life, and upon her death to pay the income, and ultimately the corpus, to his children or their descendants. He reserved power to alter in any respect the provision for distribution of income or principal, without, however, revoking the trust, revesting corpus in himself, or requiring that income be paid to or accumulated for him or applied to insurance premiums on his life. If a beneficiary predeceased him, his or her share was to revert to the settlor. The settlor retained power to remove the trustee, direct the trustee in the exercise of its powers to retain or dispose of corpus and to invest and reinvest the proceeds of a sale, and to vote stock or direct the trustee how to vote it. The court held the income to be taxable to the settlor under the provisions of section 22(a).
In the Hawkins case the income from the trust, created in 1932, was to be added to the corpus and reinvested for the first 10 years of its term of 20 years and during the remainder of its term was to be distributed equally to three named persons (assumed to be grandchildren of the settlor), and then all the principal was to be similarly divided. The settlor reserved no control over the management of the trust by the trustee, a bank, or right of revocation, but retained power to modify the provisions for distribution among the named beneficiaries. The court held that the income of the trust in 1938 and 1939 was not taxable to the settlor.
Here the settlor reserved no power of revocation or management of the trust, but, notwithstanding the provision, he and the trustee modified the trust instrument in May 1941 to include issue of the named beneficiaries as additional beneficiaries, and distributions of income of the trust in the taxable year were made to some of the new beneficiaries. He reserved the exclusive right to direct or withhold payments of income and principal to the named beneficiaries. Thus, while no right was reserved to direct the trustee to make distributions of income or corpus to himself during his lifetime, the settlor had unlimited power to withhold trust income for accumulation as corpus, or to make distribution thereof, and of corpus, to any one or more of the named beneficiaries at any time and in any amount. These rights could have been used wholly or partially to satisfy the settlor's legal obligation for support of his wife (since she was named a beneficiary) and in accordance with the amendment of the trust, his issue, if any, by his wife. The record does not show whether the settlor and wife had any living issue. As in George v. Commissioner, 143 Fed.(2d) 837 (where the trust instrument gave grantor power to add other beneficiaries as well as alter the distributions among the named beneficiaries, at will), ‘The named beneficiaries acquired only potential interests and no real ownership.‘ ‘The power to dispose of income is the equivalent of ownership of it‘ and the right to distribute constitutes enjoyment of the income. Helvering v. Horst, 311 U.S. 112. In addition, the provisions of section 5(d) and (e) of trust No. 79 could have been modified by the settlor to make the income and principal of the trust in question distributable to the estate of petitioner upon his death. During the taxable year the settlor chose to distribute most of the trust income rather than accumulate it for future disposition by one of the other methods available to him. Trust No. 79 was revoked in 1942 and in 1944 or 1945 trust No. 189 was canceled, with the consent of the beneficiaries. The record does not show whether the trust corpus was distributed to the settlor. The termination of the two trusts at least put the settlor in a position to claim the estates for himself or his estate. The assets in trust No. 189 were also available to pay debts of the petitioner and taxes of petitioner, his estate and the trusts upon his death.
The settlor's lack of complete control over the management of the trust is not controlling, in view of the broad powers he originally reserved to dispose of income and corpus by giving written directions binding upon the trustee, and the power to direct distribution to new beneficiaries other than those originally named, actually exercised by him pursuant to the amendment of the trust, agreed upon by him and the trustee in May 1941. Having actually directed distribution to new beneficiaries, the petitioner, though the instrument did not provide it and named only certain beneficiaries, without conferring power to modify or amend the instrument, is in no position to contend that the trust instrument gave him no such power or right. Full exercise of such rights would have rendered the trust ineffective and destroyed it for all practical purposes. George v. Commissioner, supra. Such powers confined the important duties of the trustee to collecting income and making investments and reinvestments.
The settlor had ample means, other than the property in trust No. 189, and his wife had substantial income in the taxable year from her separate estate. In Brown v. Commissioner, 131 Fed.(2d) 640, containing facts like those in the Buck case, the court remarked:
* * * We think that a settlor who is a person of means and who can control the spending of a fund, which she has set up, in every respect except spending it for herself is sufficiently the ‘owner‘ of the fund to make its income taxable to her under sec. 22(a). * * *
To the same effect is Lura H. Morgan, 2 T.C. 510, with respect to trust E, involved therein.
The facts here serve to distinguish the case from Hawkins v. Commissioner, supra (which reversed a memorandum decision of the Tax Court). There the settlor could not make her estate beneficiary of the trust, nor make distributions to dependents, nor use trust property for payment of her debts or taxes upon her death. She had no power to add new beneficiaries, a right actually exercised here with questionable authority, but by the trustee recognized during the taxable year.
That the original beneficiaries, other than petitioner's wife, were not persons dependent upon the petitioner does not in our view require different conclusions than above expressed. The cases along the line of the Clifford doctrine are not limited to mere dependency of beneficiaries on the trustor.
We think the facts here are sufficiently like those in the cases relied upon by the respondent to require a like conclusion. Accordingly,
Decision will be entered for the respondent.