Opinion
Docket No. 5722.
1945-10-31
ELSIE C. EMERY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert A. B. Cook, Esq., J. N. Welch, Esq., and Lawrence E. Green, Esq., for the petitioner. James T. Haslam, Esq., for the respondent.
1. Petitioner during the taxable years 1939, 1940, and 1941 was a beneficiary of five trusts created in 1937 by her husband. The trustee of each trust was to pay petitioner a certain sum per month for life ‘first out of income and thereafter out of principal, if necessary.‘ The excess income during petitioner's life was to be paid to such charities ‘as may be designated by the Donor‘ and petitioner. Each trust vested petitioner ‘with full power and authority to cancel or revoke this trust at any time in whole or in part‘ and in the event of such cancellation or revocation, the trustee was to pay petitioner ‘the whole of the principal of the trust fund * * * free and discharged of all trusts.‘ Held, all of the income of the five trusts for the taxable years in question is taxable to petitioner.
2. Petitioner for 1939 omitted from her gross income an amount in excess of 25 percent of the amount stated in her return. The deficiency notice was mailed within five years after the return was filed. Held, the assessment of the deficiency for 1939 is not barred by the statute of limitations. Robert A. B. Cook, Esq., J. N. Welch, Esq., and Lawrence E. Green, Esq., for the petitioner. James T. Haslam, Esq., for the respondent.
This proceeding involves the determination by the respondent against petitioner of deficiencies in income tax for the calendar years 1939, 1940, and 1941 of $3,204.24, $3,575.60, and $9,934.30, respectively.
The deficiencies are due primarily to the respondent's determination that the net income as disclosed by petitioner's returns for the years involved should be increased on account of ‘Income from fiduciaries‘ of $28,943.62, $17,999.99, and $18,770 for the years 1939, 1940, and 1941, respectively. For the year 1941 the respondent also determined that petitioner's net income as reported should be increased by $3.73 on account of a net long term capital loss adjustment. Because of these increases in income the respondent allowed petitioner, under section 23(o) of the Internal Revenue Code, additional deductions for contributions in each year limited to 15 percent of petitioner's net income as so adjusted.
In the statement attached to the deficiency notice the respondent explained the increase for 1939, in part, as follows:
The increase, $28,943.62, reflects a recomputation of distributable taxable income from the Trusts under indenture of Allan C. Emery * * * .
It is the opinion of this office that the entire income of the five trusts created by your husband, Allan C. Emery is taxable to you for the reason that you had the power and authority to cancel or revoke the trusts at any time or times in whole or in part; also to amend or alter the trusts in such manner and at such time or times as you may see fit. In the event of cancellation or revocation of the trusts the trustee shall pay the principal to you.
The trust instruments provided for the payment of $300.00 a month as an annuity either out of income or principal to you. Subject to this annuity any and all funds of the trust estates and any and all income derived therefrom which shall be paid, applied, or set aside by the trustees shall be used exclusively for such religious, charitable, or educational purposes as may be designated by you and your husband or your survivors.
It is also the opinion of this office that the contributions made by the trusts are considered as your personal contributions and therefore you have been allowed an additional deduction subject to the fifteen percent limitation for for the contributions made by the fiduciaries as follows:
+-------------------------------------------+ ¦Fiduciary ¦Contributions¦ +-----------------------------+-------------¦ ¦ ¦paid by trust¦ +-----------------------------+-------------¦ ¦Trust u/ind A. C. Emery T2824¦$2,188.73 ¦ +-----------------------------+-------------¦ ¦Trust u/ind A. C. Emery T2825¦2,188.72 ¦ +-----------------------------+-------------¦ ¦Trust u/ind A. C. Emery T2826¦2,188.72 ¦ +-----------------------------+-------------¦ ¦Trust u/ind A. C. Emery T2827¦2,188.72 ¦ +-----------------------------+-------------¦ ¦Trust u/ind A. C. Emery T2828¦2,188.73 ¦ +-----------------------------+-------------¦ ¦ ¦10,943.62 ¦ +-------------------------------------------+
Similar explanations were made by the respondent for the above mentioned 1940 and 1941 increases in income from fiduciaries.
By appropriate assignments of error petitioner contests all of the adjustments made by the respondent, and also raises the question of the statute of limitations as to the year 1939.
FINDINGS OF FACT.
Most of the facts have been stipulated and we adopt this stipulation as part of these findings.
Petitioner is the wife of Allan C. Emery and resides with her husband in Weymouth, Massachusetts. Her individual income tax returns for the calendar years 1939, 1940, and 1941 were filed with the collector for the district of Massachusetts.
On August 20, 1937, Allan C. Emery created 5 trusts and transferred to each trust 150 shares of Emery & Conant Co. common. In each trust Allan C. Emery was referred to as the donor and the Boston Safe Deposit & Trust Co., a corporation was referred to as the trustee. Each of these trusts was amended by petitioner, acting pursuant to a power given to her in each of the trusts. The amendments were 4 in number and were dated September 28, 1937, August 29, 1939, January 8, 1942, and January 21, 1944. One of the trusts, hereinafter sometimes referred to as T2824, was for the benefit of petitioner and charities during her life and thereafter for the benefit of her son, Allan C. Emery, Jr., and others and charities. Each of the other 4 trusts (numbered T2825 to T2828, inclusive) and the amendments thereto, are identical with T2824 and the 4 amendments, except that in each of the other trusts there is inserted the name of another child of petitioner in place of Allan C. Emery, Jr. Petitioner had 5 children. The pertinent provisions of T2824, as amended by the amendment dated September 28, 1937, are as follows:
1. To pay to ELSIE CONANT EMERY, wife of the Donor, during her lifetime or for such period thereof as the accrued income and principal of this trust will permit, the sum of * * * $300 * * * per month, payable monthly commencing May 15, 1938, first out of income and thereafter out of principal, if necessary.
2. Subject to the provisions of the preceding paragraph and Paragraph 5 and the first sub-paragraph of Paragraph 6, and the first sentence of the second sub-paragraph of Paragraph 6, said trust is created and organized and shall be administered exclusively for religious, charitable and educational purposes, and any and all funds of the trust estate and any and all income derived therefrom which shall be paid, applied or set aside by the Trustee pursuant to the provisions hereinafter set forth shall be used exclusively for such religious, charitable or educational purposes as may be designated by the Donor and the said Elsie Conant Emery * * * .
3. The Trustee acting hereunder shall have full power and authority throughout the continuance in effect of said trust to do and perform the following things:
(b) To pay, apply or set aside such part or all of the net income after the payment of the annuity provided for in Paragraph 1 hereof, and the payments thereafter as provided for in Paragraph 6, to or for the use or benefit of any person, corporation, association or institution for the purpose of promoting, assisting or carrying on any religious, charitable or educational activity or project which the Donor and the said Elsie Conant Emery, and the survivor of them, or following the decease of the survivor, and during the remainder of the term of this trust, a majority of the adult beneficiaries, may designate in writing and in the amount or amounts also to be designated by them.
5. Should the net income from the principal of the trust fund prove insufficient at any time to meet and discharge the annuity obligation in Paragraph 1 hereof imposed, or if for any reason to be expressed at any time by the said Elsie Conant Emery, it should be her desire or wish that the trust in this indenture created be terminated, she is hereby vested with full power and authority to cancel or revoke this trust at any time in whole or in part by a writing to that effect addressed to the Trustee, and she is further vested with the power to amend or alter this trust in such manner and at such time or times as she may see fit. In the event of cancellation or revocation by the said Elsie Conant Emery, it shall be the duty of the Trustee forthwith to pay unto her the whole of the principal of the trust fund, or such part or amount thereof, as she may designate, together with any accrued and undistributed income, less the charges thereagainst, free and discharged of all trusts.
6. In the event of the decease of the said Elsie Conant Emery without having exercised the full power of revocation or cancellation hereinbefore in the preceding paragraph given her, such part of the principal of the trust fund as, in the opinion of the trustee, which shall be conclusive and binding upon all persons, may at the time of her decease be required for the purpose of providing out of income the said annuity of * * * $300 * * * per month or the entire principal if no lesser part shall be sufficient so to provide, shall be continued in trust as a separate fund for the further period of five (5) years from and after her decease, and the entire net income therefrom shall during such period be payable quarter-annually, or oftener in the discretion of the Trustee, to ALLAN COMSTOCK EMERY, JR. * * * .
Upon the expiration of the said five-year period, the principal of that portion of the trust fund then continued in trust as aforesaid shall be divided amongst those then participating or entitled to participate in such income and in the proportion that each is so entitled to participate. The Trustees shall at the time of such distribution as aforesaid also distribute the remainder of the trust fund then in its custody, together with any accrued and undistributed income, to such persons, religious, charitable or educational institutions as the beneficiary, or in the event of there being more than one beneficiary, as a majority of the adult beneficiaries, then participating in the annuity provisions of this trust may in writing designate * * * .
10. Except as provided in Paragraphs 2 and 3(b) hereof, the Donor does not reserve to himself any right, title or interest whatsoever in the principal fund or income therefrom, but expressly divests himself of all thereof; nor does he reserve any rights whatsoever with respect to amending, varying, controlling or revoking this trust. Should any interest now or hereafter transferred into this trust ever revert or accrue to the Donor, such interest is hereby irrevocably given in equal parts to WHEATON COLLEGE, of Wheaton, Illinois, and EVANGELISTIC ASSOCIATION OF NEW ENGLAND, with present headquarters in Tremont Temple Building, Boston, Massachusetts.
By the amendments dated August 29, 1939, paragraph 6 of the five trusts was amended by substituting a ten-year period for the five-year period mentioned therein. By the amendments dated January 8, 1942, paragraph 7 of the five trusts was amended in a manner not here material. By the amendments dated January 21, 1944, petitioner released all power which she had to amend, alter, or revoke the trusts.
The total income of the five trusts for 1939 was $28,943.62 before any deduction for any distribution to beneficiaries. Of that amount $10,943.62 was reported by the fiduciary as ‘set aside for religious, charitable, and educational purposes‘ and $18,000 was reported as taxable to the fiduciary.
Petitioner filed her individual income tax return for the calendar year 1939 on March 1, 1940, and did not report therein any income as having been received from any of the five trusts. She did report a gross income of $2,378.42; deductions for charitable contributions of $688.55, reduced to $233.07 on account of 15 percent limitation; other deductions of $824.59; a net income of $1,320.76; and a tax liability of $47.52. The respondent increased the income reported by adding thereto the above mentioned amount of $28,943.62 representing the total income of the five trusts for 1939, and decreased the income thus determined by allowing an additional deduction of $4,341.55 for contributions. The notice of deficiency was mailed to petitioner on June 8, 1944. The additional deduction of $4,341.55 for contributions was explained in the statement attached to the deficiency notice as follows:
+-----------------------------------------------------------------------------+ ¦(b) Additional deduction for contributions ¦ ¦$4,341.55 ¦ +--------------------------------------------------------+---------+----------¦ ¦Claimed in your return ¦$233.07 ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦Additional deduction allowed ¦4,574.62 ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦Allowed herein ¦$4,341.55¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦The increase in income shown under item (a) permits an ¦ ¦ ¦ ¦additional deduction for contributions limited to ¦ ¦ ¦ ¦fifteen percent of your adjusted income which is ¦ ¦ ¦ ¦computed as follows: ¦ ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦Net income without deduction for contributions ¦ ¦$30,497.45¦ +--------------------------------------------------------+---------+----------¦ ¦Allowable limitation on contributions (section ¦ ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦23 (o) of the Internal Revenue Code): ¦ ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦15% of $30,497.45 ¦ ¦$4,574.62 ¦ +--------------------------------------------------------+---------+----------¦ ¦Total contributions actually paid: ¦ ¦ ¦ +--------------------------------------------------------+---------+----------¦ ¦Direct by you ¦ ¦$233.07 ¦ +--------------------------------------------------------+---------+----------¦ ¦Through fiduciaries ¦ ¦10,943.62 ¦ +--------------------------------------------------------+---------+----------¦ ¦Total ¦ ¦$11,176.69¦ +-----------------------------------------------------------------------------+
The taxable income of the five trusts for 1940 was $25,837.52 before any deduction for any distribution to beneficiaries. The five fiduciary returns show a total of $7,837.52 on line 16, ‘Less amount distributable to beneficiaries,‘ and a total of $18,000 on line 17, ‘Net income (taxable to fiduciary).‘ The individual income tax return filed by petitioner for 1940 reported $7,837.53 as received by her from the five trusts, but the return did not include any portion (except apparently one cent) of the $18,000. The respondent increased the income reported by adding thereto the amount of $17,999.99 representing the difference between the above mentioned amounts of $25,837.52 and $7,837.53. The respondent also allowed petitioner an additional deduction of $2,457.06 for contributions in 1940.
For the year 1940 the trustee of the five trusts paid petitioner a total of $18,000 from the five trusts and made contributions to different organizations from the five trusts in the total amount of $1,075. The balance of the net income of the five trusts for the year 1940 was accumulated.
The total income of the five trusts for 1941 was $44,949.46 before any deduction for any distribution to beneficiaries. The five fiduciary returns show a total of $26,177.01 on line 16, ‘Less amount distributable to beneficiaries,‘ and a total of $18,772.45 on line 17, ‘Net income (taxable to fiduciary).‘ The individual income tax return filed by petitioner for 1941 reported $26,177.01 as received by her from the five trusts, but did not include any portion of the $18,772.45. The respondent increased the income reported by adding thereto the amount of $18,772.45
representing the difference between the above mentioned amounts of $44,949.46 and $26,177.01. The also allowed petitioner an additional deduction of $224.38 for contributions in 1941.
This amount of $18,772.45 includes $2.45 of the net long term capital loss adjustment of $3.73 referred to in our opening statement, which was explained in the statement attached to the deficiency notice, in part, as follows:
For the year 1941 the trustee of the five trusts paid petitioner a total of $18,000 from the five trusts and made contributions to different organizations from the five trusts in the total amount of $2,455. The balance of the net income of the five trusts for the year 1941 was accumulated.
Petitioner's individual income tax returns for the years 1939, 1940, and 1941 were prepared on the basis of cash receipts and disbursements.
OPINION.
BLACK, Judge:
The issues presented are (1) the determination of the extent, if any, to which petitioner is taxable for the years 1939, 1940, and 1941 on the income of the five trusts created by her husband in 1937, and (2) whether the assessment of the deficiency for 1939 is barred by the statute of limitations. The answer to (2) depends upon our solution of (1).
The parties agree that the income of the five trusts before any deduction for any distribution to beneficiaries for the years 1939, 1940, and 1941 was $28,943.62, $25,837.52, and $44,949.46, respectively. In her returns for 1940 and 1941 petitioner reported $7,837.53 and $26,177.01 of the respective income of the five trusts for those years and there is no issue involved as to those amounts. Petitioner's principal contention is that the $18,000 paid to her under paragraph 1 of the five trusts for each of the three years in question was ‘property acquired by gift‘ and was exempt from taxation to her under section 22(b)(3) of the Internal Revenue Code;
Burnet v. Whitehouse, 283 U.S. 149; and Helvering v. Pardee, 290 U.S. 365. Petitioner's next contention is that the $10,943.62 of trust income for 1939 which was reported by the fiduciary as ‘set aside for religious, charitable, and educational purposes‘ is not income to petitioner because of petitioner's alleged renunciation of any right to receive such income. These two contentions, together with the above amounts reported by petitioner for 1940 and 1941, take care of all of the income of the five trusts except $772.45 for the year 1941. Petitioner has apparently abandoned any assignment of error made with respect to this amount of $772.45, for in her brief, after stating the principal issue relative to the $18,000 paid to her under paragraph 1 of the five trusts, she says: ‘This is the only issue with respect to the taxable years 1940 and 1941.‘
SEC. 22. GROSS INCOME.(b) EXCLUSIONS FROM GROSS INCOME.— The following items shall not be included in gross income and shall be exempt from taxation under this chapter:(3) GIFTS, BEQUESTS, AND DEVISES.— The value of property acquired by gift, bequest, devise, or inheritance (but the income from such property shall be included in gross income).
The respondent contends that, because of the power vested in petitioner under paragraph 5 of the trusts ‘to cancel or revoke this trust at any time in whole or in part,‘ petitioner possessed the equivalent of ownership of all the corpora of the trusts and as such owner she is taxable on all of the income therefrom, after deducting all contributions to charity, subject to the 15 percent limitation.
We would agree with both of petitioner's contentions heretofore mentioned if it were not for the power vested in petitioner under paragraph 5 of the five trusts. Disregarding for the moment paragraph 5, the $300 per month payable to petitioner under paragraph 1 of each of the trusts was payable to her at all events and would not be a distribution of income to her but rather a discharge of a gift, and, as such, exempt from taxation to her under section 22(b)(3), supra, and the cases relied upon by petitioner. See also Coleman v. Commissioner, 151 Fed.(2d) 235. Likewise, the $10,943.62 of trust income for 1939 which was reported by the fiduciary as ‘set aside for religious, charitable, and educational purposes‘ would not be income to petitioner, but would be deductible by the fiduciary under section 162(a) of the code,
since the respondent determined in the notice of deficiency that the contributions were ‘actually paid‘ by the fiduciary. We think, however, that the respondent's determination must be sustained in its entirety by virtue of the power vested in petitioner under paragraph 5 of the trusts. Because of such power, we think the instant case is controlled by such cases as Richardson v. Commissioner, 121 Fed.(2d) 1; Ella E. Russell, 45 B.T.A. 397; Jergens v. Commissioner, 136 Fed.(2d) 497; certiorari denied, 320 U.S. 784; and Mallinckrodt v. Nunan, 146 Fed.(2d) 1; certiorari denied, 324 U.S. 871; rehearing denied, April 30, 1945. Petitioner in her brief has attempted to distinguish these cases, but we do not think they are distinguishable. Petitioner urges as an authority in her favor Plimpton v. Commissioner, 135 Fed.(2d) 482. We think, however, that there is a material distinction between the Plimpton case and the four cases referred to above. In the Plimpton case the taxpayer-beneficiary could have only certain income of the trust distributed to him ‘in the discretion of the trustees,‘ of which he was only one. The court pointed out the distinction in that case from such cases as Richardson v. Commissioner, supra, in the following language:
SEC. 162. NET INCOME.The net income of the estate or trust shall be computed in the same manner and on the same basis as in the case of an individual, except that—(a) There shall be allowed as a deduction (in lieu of the deduction for charitable, etc., contributions authorized by section 23(o)) any part of the gross income, without limitation, which pursuant to the terms of the will or deed creating the trust, is during the taxable year paid or permanently set aside for the purposes and in the manner specified in section 23(o), or is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals, or for the establishment, acquisition, maintenance or operation of a public cemetery not operated for profit.
The case of Richardson v. Commissioner * * * , upon which the government relies, is clearly distinguishable. In that case it was held that the income of a trust created by a wife with funds given to her by her husband was taxable to the husband although he was not the settlor. But the husband there had an unqualified right to revoke the trust and take all the funds himself, including accumulated income, which is not the case here. These features are important and make the Richardson case clearly distinguishable from the one before us.
In the instant case and in the four cases referred to above the taxpayer-beneficiary, acting alone and without the concurrence of any one else, had the right to acquire either the corpus or income of the trust at any time. In Richardson, it was the right to ‘cancel and terminate‘ the trust agreement; in Russell, it was the right to receive ‘such part or parts or the whole of the principal * * * as she may, be writing lodged with the Trustees, direct‘; in Jergens, it was the ‘power to alter, amend, or modify the trust as he saw fit, or to revoke it in whole or in part, with the single exception that he did not have power to make the proceeds of the insurance payable to his estate‘; in Mallinckrodt, Jr., it was ‘to pay the residue of such annual trust income to petitioner during his life, upon his request‘; and in the instant case it was the ‘full power and authority to cancel or revoke‘ as provided in paragraph 5 of the trust instruments, set out in full in our findings. We think these cases are controlling here and that petitioner is taxable on all of the income of the five trusts in the manner determined by the respondent. The assessment of the deficiency for the year 1939, as determined by the respondent, is not barred by the statute of limitations, for the reason that the amount of unreported income taxable to petitioner is in excess of 25 percent of the reported gross income and the notice of deficiency was mailed to petitioner within five years after her return was filed. See sec. 275(c), I.R. C., and O'Bryan v. Commissioner, 148 Fed.(2d) 456, affirming 1 T.C. 1137.
Decision will be entered for the respondent.
+-----------------------------------------------------+ ¦(b) Net long term capital loss adjusted¦ ¦$3.73¦ +---------------------------------------+-------+-----¦ ¦Claimed in your return (loss) ¦($1.28)¦ ¦ +---------------------------------------+-------+-----¦ ¦Corrected herein gain ¦2.45 ¦ ¦ +---------------------------------------+-------+-----¦ ¦Difference ¦$3.73 ¦ ¦ +-----------------------------------------------------+