Opinion
Docket No. 2773.
1944-12-27
JOEL E. HALL, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Angus M. Woodford, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent.
Petitioner created an irrevocable trust for a fifteen-year period, designating his four daughters as beneficiaries. He named himself as trustee and was to have ‘unlimited powers of investment, contract, compromise, sale, lease and otherwise‘ with respect to the trust property. He could distribute the income or withhold it as he saw fit and income not distributed became principal. He could invade principal for the education and maintenance of the named beneficiaries or to meet expenses of illness, emergency, or other extreme misfortune. Except in case of his wife if she should succeed him as trustee, the above unlimited powers over corpus reserved to himself were denied to successor trustees. Held, the entire income of the trust for the taxable year 1941 is taxable to grantor under section 22(a) of the Internal Revenue Code. Angus M. Woodford, Esq., for the petitioner. Stanley B. Anderson, Esq., for the respondent.
Respondent has determined a deficiency in income tax against petitioner for the year 1941 in the amount of $3,372.63. The issue raised is whether petitioner is taxable on all or only a part of the income of a trust created by him and in which his four daughters are named as beneficiaries.
FINDINGS OF FACT.
The petitioner is a resident of Holdenville, Oklahoma, and filed his income tax return for 1941 with the collector of internal revenue for the district of Oklahoma. Between 1921 and 1937 he was actively engaged in the royalty phase of the oil business and also dealt in fee lands and leases. During that time he did very little drilling, but since 1937 he has been primarily interested in the drilling of wells.
On December 28, 1940, petitioner created an irrevocable trust, naming his four daughters as beneficiaries. He transferred to himself as sole trustee one-half of the seven-eighths working interest in an oil and gas lease and a one-fourth interest in the mineral rights in 160 acres of land, aggregating $35,000 in value. He later acquired for the trust additional property having a value of about $25,000, consisting of producing oil properties and an interest in a producing lease. In 1941 petitioner was worth approximately $350,000 and his wife was worth about $100,000. The approximate annual income realized from their properties in 1940, 1941, and 1942 was $10,000 to $12,000.
Petitioner's eldest child, Nanette, became twenty-one years of age on January 25, 1941. Also in 1941, Joellen, the second child, was twenty on December 26, Marilyn was eighteen on September 23, and Patricia, the youngest child, was fifteen on October 22. Joellen has since graduated from the University of Iowa. At the time of the trial in this proceeding, Marilyn was attending Mills College in Oakland, California, and Patricia was attending the Hockaday Girls' School in Dallas, Texas.
Petitioner has kept separate books and has filed separate returns for the trust fund. He has never used the trust money for his personal use, has never borrowed any of the trust money for himself, and has not spent any of it for education or maintenance of his daughters.
During 1941 petitioner, as trustee, issued checks against the trust account for the purchase of series E bonds in the amount of $750 for each of his two eldest daughters. The bonds were purchased in their names and are kept in petitioner's personal lock box.
Article I of the trust instrument provides that the trustee shall hold, manage, operate, invest, and reinvest proceeds of all the property involved and collect, receive, and recover the profits, proceeds, issues, interests, and income therefrom, and, after deducting the ordinary and necessary expenses as provided, shall hold and distribute the income and principal therefrom as follows:
(a) All of the net income from investments made by the Trustee from the principal accumulation, may be distributed to the beneficiaries, Trustor's four children, to-wit: Nanette Wilbanks, nee Hall; Joellen Hall; Marilyn Hall and Patricia Hall, in equal shares, at any time in the discretion of the Trustee.
(b) It is further provided that in addition to the distribution of the income, the Trustee may at any time during the continuance of this trust, pay to or expend for the use and benefit of said beneficiaries, any and all sums reasonably necessary for the purposes of educating and maintaining said children and for the purpose of defraying the expense of any illness, emergency or other extreme misfortune. These disbursements may be made from the principal accumulation of said trust estate and it is understood that the net income from the property herein assigned and conveyed to the Trustee, shall be considered as principal for the purposes of this trust.
(c) In the event any or all of the said beneficiaries should become deceased prior to the full distribution of this trust estate to them, with issue surviving, then the share of such deceased beneficiary then remaining in the hands of the Trustee, shall be held for the use and benefit of said issue, share and share alike, upon the principal of representation, and such portions of the income and principal as may be deemed necessary by the Trustee to provide for the maintenance, education and support of said issue, shall be paid to them or expended in their behalf in the discretion of the Trustee until the termination of this trust. In the event any or all of said beneficiaries named herein shall die prior to a full distribution of the estate without issue surviving, then all of the share of said deceased beneficiary remaining in the hands of the Trustee, shall be divided equally among the surviving beneficiaries or their issue. In the event all of the said beneficiaries shall die without issue and prior to the full distribution of this trust estate, then the remaining portion of said trust estate shall pass to and become the property of the parents of said beneficiaries or the survivor if one be deceased, and if both parents be deceased, then to the heirs of said last deceased beneficiary as determined by the laws of descent and distribution of the State of Oklahoma.
Article II provides that at the expiration of fifteen years the ‘trust shall cease and terminate and the Trustee shall pay over and distribute to the beneficiaries of said trust, either in kind or in money, all of the undistributed remaining trust assets.‘
Article III states that ‘It is contemplated that some distribution of principal or income shall be made to beneficiaries while they may yet be under age of majority,‘ that such distribution may be made to the minors, their guardian, or to some third party, and that any such distribution made in good faith shall constitute the acquittance of the trustee to the extent thereof.
Article IV provides for the management and control of the income and corpus as follows:
The Trustee named herein, or his immediate successor, is hereby granted full and complete power in the management of the trust property with unlimited powers of investment, contract, compromise, sale, lease and otherwise. It being the intent of the Trustor to grant to the Trustee the same power, to deal with said property as Trustee, as the Trustor has heretofore had with one limitation only. The foregoing provision conferring broad powers on said Trustee shall have no application to successor trustees other than the original Trustee, J. E. Hall, and his immediate successor, Ruth M. Hall. All other successor trustees shall have the same powers except that investments of trust funds shall be limited to (a) Government bonds, or (b) real estate mortgages on city property in an amount not to exceed forty percent (40%) of the actual cash value of the security at the time.
Article V provides that petitioner's wife shall succeed him as trustee and, in the event of her death, resignation, or incapacity to serve, designates certain cotrustees. Article VI provides for the compensation of the trustees, it being stipulated that neither the original trustee nor his wife in the event she should serve should receive compensation for their services. Article VII is a spendthrift provision to prevent the beneficiaries from selling or otherwise disposing of their interests prior to final distribution to them. Article VIII provides that the trust is irrevocable.
The net income of the trust for 1941 was $11,374.54, all of which the respondent has determined to be taxable to the petitioner.
OPINION.
TURNER, Judge:
Respondent contends that the trust income is taxable to petitioner under the provisions of section 22(a) of the Internal Revenue Code, as that section has been construed by the Supreme Court in Helvering v. Clifford, 309 U.S. 331.
For the purposes here, the petitioner apparently has treated the income of the trust as allocable to his four daughters in equal shares and has raised issue only with respect to the income which under the trust instrument might have been distributed to each daughter after her eighteenth birthday, the total amount here in issue being $6,398.10. He contends that the Clifford case is not applicable. He raises no issue with respect to the remainder of the income.
The petitioner takes the position that his trust is clearly distinguishable from that in the Clifford case as follows: (1) The trust is for a period of fifteen years; (2) petitioner is to receive none of the benefits of the corpus or income; (3) at the termination of the fifteen-year period, all of the undistributed trust property, corpus and income, must be distributed to the beneficiaries; and (4) he has received no economic benefit from either the corpus or income of the trust.
The fact that the trust here is a fifteen-year trust, while the trust in the Clifford case was for only five years, does not of itself make the rule of the Clifford case inapplicable, the test being whether the rights of the petitioner in and to the trust corpus and the income therefrom are such as to constitute the income his income within the meaning of section 22(a), supra. Verne Marshall, 1 T.C. 442; Frederick B. Rentschler, 1 T.C. 814; and Commissioner v. Buck, 120 Fed.(2d) 775.
In the instant case, it is true that there was only a possibility of a reverter, and that possibility was rather remote. The petitioner did have the power, however, to distribute the income or withhold it, as he saw fit; and for the purposes of the trust the income not distributed became principal. He could invade principal for the purpose of educating and maintaining his children, or for the purpose of defraying the expense of any illness, emergency, or other extreme misfortune. He testified that his purpose in creating the trust was to remove the property from the hazards of the oil well drilling business in which he was engaged, and yet by the terms of the instrument he retained for himself so long as he should be trustee, and for his wife if she should succeed him, the power and right to use the property in oil well drilling ventures, or in any other venture in which he or anyone else might be engaged. And in that connection, it is noted that any successor trustee other than his wife had no such power. Taking into account the relationship of the parties and the fact that the petitioner did not put the use of corpus and the income therefrom beyond his reach, the only practical result of the grant to trust, if the claim here should be allowable, would be to effect a division of the income of the petitioner for income tax purposes. Borrowing from the language of the Supreme Court in the Clifford case, we find it ‘hard to imagine that * * * (petitioner) felt himself the poorer after this trust had been executed or, if he did, that it had any rational foundation in fact.‘ We accordingly conclude that the income of the trust was the income of the petitioner within the meaning of section 22(a) supra. Helvering v. Clifford, supra. See also Louis Stockstrom, 3 T.C. 255.
Reviewed by the Court.
Decision will be entered for the respondent.
BLACK, J., dissenting: In making himself trustee in the trust indenture for the benefit of his four children, petitioner Hall, as settlor, undoubtedly conferred upon himself large powers of administrative control over the trust corpus and income. The trust, however, was irrevocable and only upon the happening of a very remote contingency, to wit: ‘In the event all of the said beneficiaries shall die without issue and prior to the full distribution of this trust estate,‘ was any of the trust corpus or accumulated income to revert to the settlor. It is true that the settlor provided that ‘the trustee may at any time during the continuance of this trust pay to or expend for the use and benefit of said beneficiaries, any and all sums reasonably necessary for the purpose of educating and maintaining said children and for the purpose of defraying the expense of any illness, emergency or other extreme misfortune.‘ This provision in the trust indenture would undoubtedly make the income of the trust taxable to petitioner under section 167 of the Internal Revenue Code prior to its amendment in the 1943 Act, notwithstanding none of the income of the trust was used by petitioner for the purposes named. See Helvering v. Stuart, 317 U.S. 154.
However, in such cases as the above, where the evidence shows that none of the income of the trust was used for the support, education, and maintenance of the settlor's minor children, Congress in section 134 of the Revenue Act of 1943 consummated a retroactive legislative repeal of the Stuart case and reinstated the rule exemplified by E. E. Black, 36 B.T.A. 346. See David Small, 3 T.C. 1142. The majority opinion does not hold that petitioner is taxable with the income of the trust under section 167, but holds that he is taxable with it under section 22(a) because he retained such large powers of control over the corpus and income as trustee as to still leave himself owner of the property for all intents and purposes. I do not agree with such a conclusion. This case is not like Commissioner v. Buck, 120 Fed.(2d) 775, cited in the majority opinion. In the Buck case the court was careful to point out:
The outstanding fact, which distinguishes this case from Helvering v. Palmer, 115 F.2d 368 and Blair v. Commissioner, 300 U.S. 5, is that respondent has reserved to himself during his life, the power, at any time and from time to time, to ‘alter or amend in any respect whatsoever,‘ the provisions of the indenture relating to ‘the disposition of the income and principal of the trust estate or the separate shares into which the same may be divided, and to change any beneficial interest‘ thereunder. True, he cannot do so in such a way as to ‘revest in himself title‘ or ‘so as to direct that any part of the income * * * be distributed to him or be held or accumulated for future distribution to him.‘ But he has unlimited power, at any moment to reduce or obliterate the share of principal or interest originally allotted to his wife or any child, if for any reason, or for no reason, he decides, in the exercise of his uncontrolled discretion, that any of the beneficiaries is receiving more than seems desirable. * * *
In the Buck case a bank was named as trustee and the foregoing broad powers which the court commented upon were reserved to Buck as the settlor of the trust.
We have no such situation in the instant case. All the wide administrative powers of control which the trust indenture authorizes petitioner as the trustee to exercise are to be exercised by him in his fiduciary capacity. I do not understand that the trust indenture confers upon petitioner as trustee the power ‘to reduce or obliterate the share of principal or interest originally allotted to the beneficiaries‘ as the court pointed out was present in Commissioner v. Buck, supra. If I understood that the trust indenture conferred upon petitioner any such broad powers as that, then I would agree that he, as the settlor of the trust, would be taxable with the income. But as I understand the reading of the trust indenture in the instant case, all four beneficiaries were to share equally in the principal and income of the trust and the trustee had no power to change or alter their proportionate interests. For example, he had no power to say that Patricia should be the beneficiary of one-half of the income and principal of the trust instead of one-fourth of it, and that Nanette should not receive anything at all. It is true that the trustee was vested with the power to determine when and in what amounts income and principal were to be distributed to the beneficiaries or whether the income should be accumulated and reinvested and distributed to the beneficiaries at a later date. But, as I interpret the trust indenture, the trustee had to carefully account for the principal and income and at the end of the trust term of fifteen years all principal and accumulated income had to be turned over to the beneficiaries, who were entitled to receive it, and in equal shares to each beneficiary. Cf. J. O. Whiteley, 3 T.C. 1265. If the trustee was given the power ‘to reduce or obliterate‘ the share of principal or interest originally allotted to any one of his four children except ‘for the purpose of educating and maintaining said children and for the purpose of defraying the expense of any illness, injury or other extreme misfortune,‘ I fail to see it.
I do not think the power of a trustee to determine whether income or principal of a trust shall be distributed to a beneficiary or withheld from him in a given year, so long as there is no power to deprive such beneficiary of his ultimate share on final distribution, gives the trustee any such economic interest in the property of the trust as to make the income taxable to him under section 22(a). See my concurring opinion in Lorenz Iversen, 3 T.C. 756, at page 775.
Considering all the facts in the instant case, I do not think there is any more reason to say that the income of the trust is taxable to petitioner under section 22(a) of the Internal Revenue Code than there was in such cases as Frederick Ayer, 45 B.T.A. 146; David Small, supra; and Estate of Benjamin Lowenstein, 3 T.C. 1133.
Based on the foregoing reasons, I respectfully dissent from the majority opinion.