Opinion
Docket Nos. 2078-2088.
Promulgated March 31, 1944.
Petitioners are beneficiaries of certain trusts the income of which is payable to them upon request. The settlor of such trusts wished to make additional gifts thereto of certain shares having a value of $2,800,000, but was unable to pay the $600,000 in gift taxes which would be due thereon and was unwilling to become personally liable on any indebtedness therefor. A bank agreed to loan $600,000 on the sole security of the shares. Accordingly the settlor-donor transferred the shares in varying amounts to the several trusts, borrowed $600,000 from the bank, payable in 5 years, and executed a collateral agreement which gave to the bank a lien upon such shares as security for its loan, the bank agreeing that there should be no personal liability for its payment. The bank had the right, which was never exercised, to have the securities transferred to its name, but all dividends upon such shares were to belong to the equitable owners thereof. The beneficiaries instructed their various trustees to apply 80 percent of the dividends from such shares to the payment of the loan. Held, the dividends from the shares paid to the trustees and, in turn, paid by them to the bank pursuant to instructions of the beneficiaries constitute taxable income of the beneficiaries.
Harry W. Kroeger, Esq., and Frank H. Fisse, Esq., for the petitioners.
W. Frank, Gibbs, Esq., and J. E. Marshall, Esq., for the respondent.
These proceedings, which were consolidated for hearing, involve income taxes for the calendar years 1939 and 1940, and in the case of Adolphus Busch Orthwein, Docket No. 2088, there is also involved a delinquency penalty in the amount of $20.93. The Commissioner determined deficiencies in the following amounts with respect to the several taxpayers:
1939 1940 Adolphus Busch, III ........................ $5,936.61 $12,887.66 Catherine Milliken Busch ................... 209.88 785.44 Herbert Douglas Condie, Jr., and Marie Eleanor Condie ..................... 155.44 576.96 August A. Busch, Jr. ....................... 5,968.43 15,835.44 Elizabeth Overton Busch .................... 302.91 1,079.21 Marie Busch Jones .......................... 2,096.88 8,623.61 Willis D. Hadley and Jacqueline Hadley ..... 314.58 Jacqueline Jones Hadley .................... 560.29 Alice Busch Tilton ......................... 2,867.78 12,339.68 Clara Busch Orthwein ....................... 3,897.67 5,604.51 Adolphus Busch Orthwein .................... 83.70 483.51 Several of the issues originally raised by the pleadings have been settled by stipulations filed herein, to which effect will be given in computations to be filed under Rule 50. The sole issue remains in each of the cases as to whether respondent erred in his determination that certain amounts were includible in the taxable incomes of the respective petitioners, as beneficiaries of certain trusts, as income to be distributed currently by the trustees.FINDINGS OF FACT.
Petitioners in these proceedings are all residents of St. Louis County, Missouri, and filed their income tax returns for the years 1939 and 1940 with the collector at St. Louis, except for the petitioner in Docket No. 2088, for whom no return was filed in 1939 and against whom a penalty has been asserted.
Alice E. Busch is the widow of August A. Busch, and the mother of petitioners August A. Busch, Jr., Adolphus Busch, III, Alice Busch Tilton, Clara Busch Orthwein, and Marie Busch Jones; the mother-in-law of petitioners Elizabeth Overton Busch and Clara Milliken Busch; and the grandmother of Adolphus Busch Orthwein, Jacqueline Jones Hadley, and Marie Eleanor Condie.
In 1939 or in prior years, she created various trusts for the benefit of the petitioners, with Adolphus Busch, III, August A. Busch, Jr., and either the St. Louis Trust Co., or the Mississippi Valley Trust Co., as trustees, in each case. Each trust indenture provided that the trustees should pay to the beneficiary during his life so much of the annual income of the trust estate for each calendar year as he should have requested in writing, the net income not so requested by and paid to him to be added to the principal of the trust estate. Upon the death of the beneficiary, the trust estate was to be distributed pursuant to his appointment by will, or otherwise as provided, to members of the family.
In December of 1939 Alice E. Busch was considering the transfer to the several trusts which she had theretofore created, or which she then created, of an aggregate of 40,630 shares in the Trust for Equitable Interests in Anheuser-Busch, Inc., hereinafter referred to as TEI shares. These shares had a market value at that time of about $70 per share, or a total market value of $2,800,000. Upon discovering that the gift tax on such a transfer would amount to about $600,000, Alice E. Busch negotiated a loan in that amount from the Mississippi Valley Trust Co., secured by the TEI shares constituting the subject matter of the gift, stipulating in connection therewith that upon the delivery by her of such shares as security she would stand free and released from any obligation or liability to pay such loan or the interest thereon, and that the bank would look only to the collateral security for the payment thereof. The bank, knowing the nature and value of the TEI shares, agreed to look only to the shares for the repayment of its loan.
The loan was completed, and on December 9, 1939, Alice E. Busch executed a series of notes payable to the Mississippi Valley Trust Co., aggregating $600,000, each of which provided for the payment of a stipulated sum on or before five years after date, with certain minimum annual payments, and in conjunction with each such note she executed a collateral agreement which created a lien for the payment of the principal and interest of the note on a specified number of the TEI shares, and contained the stipulation that the bank would look only to such shares for its payment, and that neither Alice E. Busch nor any equitable owner succeeding to her interest would be individually liable upon the note, and giving the bank the right and power to have the shares transferred to its own name at its option. This right was never exercised, and the shares have, since their transfer by Alice E. Busch, remained in the name of the trusts and the dividends have been paid to the trusts.
The collateral agreement contained the following provisions:
All dividends and distributions of cash, or of other property, made upon said trust shares or any substituted collateral, while the above note is unpaid, shall belong to the then owners of the equitable title to said collateral * * *.
The amount of each note represented such proportionate part of the total loan of $600,000 as the number of shares to be given to the specified trust bore to the total number of shares constituting the aggregate of the gifts, which was 40,630, and that apportioned number of shares constituted the security for that particular note.
On December 11, 1939, Alice E. Busch transferred the respective blocks of pledged shares to the several trusts, subject, in each case, to the lien created by the note and the collateral agreement relating thereto. The life beneficiary, the number of shares transferred to each trust, and the amount of the lien against such shares were, respectively, as follows:
Life beneficiary Trust shares Amount of note Adolphus Busch, III ............................. 2,126 $31,395.52 Catherine Milliken Busch and Sallie Marie Busch ............................ 4,000 59,069.65 Marie Eleanor Busch Condie ...................... 2,000 29,534.83 August A. Busch, Jr. ............................ 2,126 31,395.52 Elizabeth Overton Busch ......................... 2,000 29,534.82 Lilly Marie Christy Busch ....................... 1,000 14,767.42 Carlota Clark Chouteau Busch .................... 1,000 14,767.42 Elizabeth Overton Busch, Jr. .................... 1,000 14,767.41 August A. Busch, III ............................ 1,000 14,767.41 Marie Busch Jones ............................... 6,126 90,465.17 Jacqueline Jones Hadley ......................... 2,000 29,534.83 Clara Busch Orthwein ............................ 4,126 60,930.35 Adolphus Busch Orthwein ......................... 2,000 29,534.83 James Busch Orthwein ............................ 2,000 29,534.82 Alice Busch Tilton .............................. 8,126 120,000.00 ------- ---------- Total ..................................... 40,630 600,000.00 It was determined during the negotiations that the notes could be retired within five years by the application of less than the entire amount of the dividends which would be received within that period upon the pledged shares and an agreement was worked out before December 9, 1939, between all the interested parties that all of the income from the pledged shares received during the remainder of 1939, and 80 percent of the income thereafter received, should be applied to the payment of the loan, leaving 20 percent of the 1940 and later income at the disposition of the beneficiaries, and that the pledgee would not cause the pledged shares to be transferred to its own name so long as these payments were made.Since the original trust indenture required the trustees to pay the entire income to the beneficiary upon request, each beneficiary executed written instructions, dated December 19, 1939, to the trustee, to apply 80 percent of the income to the retirement of the indebtedness which constituted a lien against the shares transferred to his trust, and to pay to him no more than 20 percent thereof.
In accordance with such instructions the trustees of each trust thereafter reserved 80 percent thereof for application to the payment of the principal and interest of the note, and distributed the balance to the beneficiary. The trustees of each trust reported the receipt of the income and paid the tax on the entire income in 1939 and 80 percent in 1940, paid or reserved by it for payment on the note. The petitioners herein reported and paid tax on the 20 percent distributed to them in 1940.
No return was filed by or for Adolphus Busch Orthwein in 1939, since it was believed that he had no income subject to tax. Upon determining that the entire income from the TEI shares in 1939 paid or reserved for payment by the trust on the note secured by a lien on the shares held by the trust for his benefit was taxable to him as beneficiary, a penalty was assessed against him in the amount of $20.93 for failure to file a return, as provided in section 291 of the Internal Revenue Code.
OPINION.
The principal issue presented in these proceedings is whether the Commissioner erred in his determination that the income from certain shares of stock held by the several trusts involved here, and applied by the trustees to the payment of the indebtedness for which the shares had been pledged as security prior to their transfer to the trusts, was, under the facts, taxable to the beneficiaries rather than to the trusts, as petitioners contend.
The secondary question, which will be resolved by our decision of the primary issue, concerns the validity of the penalty assessed against one petitioner for failure to file a return in 1939. If the income under consideration is taxable to petitioners, then the penalty is properly assessed against the petitioner, who failed to file a return in 1939; if not, then he was not required to file a return, and the penalty can not be upheld.
The facts are fully set out in our findings, and there is no necessity for reiteration here. A careful consideration of them in their proper relationship to each other leads to the conclusion that the respondent must be sustained in his position.
The respondent contends that where the beneficiary has a right to the income of a trust on merely making a written request therefor, thus having unfettered command of it, it is taxable to him, relying on Corliss v. Bowers, 281 U.S. 376, and Helvering v. Horst, 311 U.S. 112.
It is the petitioners' position that the income here in question was not at any time subject to their unfettered command, since it was subject to a preexisting right of the bank to have the shares transferred to its name, thus enabling it, at any time it chose, to receive the dividends direct.
But this position does not give effect to the provision in the collateral agreement, quoted in our findings, that the dividends should at all times belong to the owners of the equitable title to the trust shares. It should be borne in mind that only the shares themselves were pledged; the dividends to be declared thereon were not, but were, on the contrary, specifically declared to be the property of the equitable owners.
It is the general rule that where a pledgee has the right to have pledged shares transferred to its own name, it may receive, for application on the debt, any dividends which may thereafter be declared thereon. Railroad Credit Co. v. Hawkins, 80 F.2d 818; certiorari denied, 298 U.S. 667; Fletcher Cyclopedia Corporations, vol. 11, sec. 5382; Mandel v. Hudson Investment Co., 168 A. 432. But that rule would certainly not prevail where, as here, the pledge agreement itself expressly provides that the dividends should belong to the owner. Guarantee Co. of North America v. East Rome Town Co., 96 Ga. 511; 23 S.E. 503; Gaty v. Holliday, 8 Mo. App. 118; Fourth National Bank v. Manchester Real Estate Co., 77 N.H. 481; 93 A. 661; Farmers Bank v. Mosher, 63 Neb. 130; 88 N.W. 552. In such a case, while the pledgee, by causing the shares to be transferred, might possibly place itself in position to receive the dividends, as between itself and the issuing corporation, it would obviously not be entitled to retain them or apply them on the debt, but would be required, by its own agreement to pay them over to the pledgor.
It seems clear, then, that in this instance, the dividends declared on the shares belonged to the trust, assuming the trust to have been the equitable owner referred to in the pledge agreement. Belonging to the trust, they became immediately subject to the command of the petitioners, by virtue of the terms of the original trust indentures. They are, therefore, taxable to the petitioners. If it be argued that by the term "equitable owner" the instrument referred to the beneficiaries themselves, rather than to the trust, the tax effect would be exactly, but more directly, the same. Upon this issue we decide in favor of the respondent.
It follows that the penalty against the petitioner in Docket No. 2088 was properly assessed.
Decision will be entered under Rule 50.