Opinion
Docket No. 54472.
1956-11-30
ESTATE OF HIRAM SOLOMON, DECEASED, CAROLYN MANSON (FORMERLY CAROLYN SOLOMON), ADMINISTRATRIX, AND CAROLYN MANSON (FORMERLY CAROLYN SOLOMON), PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Harry Friedman, Esq., for the petitioners. Joseph F. Rogers, Esq., for the respondent.
Harry Friedman, Esq., for the petitioners. Joseph F. Rogers, Esq., for the respondent.
Undistributable capital gains earned by an irrevocable trust in 1950 are not taxable under facts of case to the grantor-life beneficiary of the trust who retained (1) limited power to invade the corpus, (2) a right to alter the shares of a designated class of remaindermen, (3) a contingent right to dispose of the trust corpus by will if she survived her mother, her issue, and their children, and (4) the right to become co-trustee with broad managerial power to act as a fiduciary.
This case involved a deficiency in income tax determined by the respondent for the calendar year 1950 in the amount of $5,237.33 with an additional to tax under section 294(d)(2) of the Internal Revenue Code of 1939 in the amount of $889.06. The respondent now concedes that there should be no addition to tax under section 294(d)(2). The only question remaining for our decision is whether the respondent erred in determining that capital gains of the Carolyn Solomon Trust were taxable in the year 1950 to Carolyn Solomon, settlor and life beneficiary of the trust, in addition to the ordinary income of the trust distributable to her in that year and reported by her.
FINDINGS OF FACT.
Some of the facts have been stipulated by the parties and are incorporated by this reference. The petitioners are Carolyn Manson, formerly Carolyn Solomon, as the administratrix of the Estate of Hiram Solomon, Deceased, and Carolyn Manson in her individual capacity. The petitioner individually and as administratrix of the estate of her husband filed a joint income tax return for the calendar year 1950 with the third New York collection district. Hiram Solomon died on April 10, 1950, and Carolyn was duly appointed and is qualified and acting as administratrix of his estate under an appointment by the Surrogate's Court of New York dated May 2, 1952. Carolyn will be referred to hereinafter as petitioner.
Sometime in 1929 Louis Goldstein, father of the petitioner, died. By his will he bequeathed two-thirds of his residuary estate to his wife, Estelle, now Estelle Graham, for life and the remainder interest in said two-thirds to his daughter Carolyn. He bequeathed the remaining one-third of his residuary estate to his wife in trust for his daughter, Carolyn, until she became 21 at which time she was to receive this one-third outright. Carolyn, upon the day after becoming 21, signed as settlor an ‘Indenture of Trust dated April 22, 1932,‘ in which Estelle Goldstein (now Graham), the widow of Louis, was named as trustee. Estelle was then 44 or 45 years old. The corpus of the trust created by Carolyn was described in a schedule ‘A’ annexed to the trust indenture as consisting of:
Interest of Settlor in the Estate of Louis Goldstein, late of the City and State of New York, deceased, of which estate ESTELLE GOLDSTEIN is Executrix and Trustee; said interest of the Settlor being one-third (1/3) of the residuary estate thereof, plus the remainder of the said residuary estate, subject to the life estate of ESTELLE GOLDSTEIN, wife to the Settlor.
The pertinent provisions of said indenture of trust were as follows:
FIRST: That the settlor in consideration of the premises and of the sum of $1.00 to her in hand paid by the trustee, the receipt whereof is hereby acknowledged, and of other good and valuable considerations, has transferred, assigned and delivered, and does hereby transfer, assign and deliver unto the trustee the property and assets enumerated in the Schedule annexed hereto and marked Schedule ‘A’.
TO HAVE AND TO HOLD the same and any other securities or property of any kind which may be delivered to the trustee pursuant to the provisions of Article SECOND hereof (all of which are hereinafter referred to collectively as ‘The Trust Estate’) unto the trustee, her successors and assigns, in trust nevertheless, for the following uses and purposes:
To hold, invest and reinvest the principal of the trust estate; to collect and receive the dividends; interest income, revenue and profits thereon, and therefrom and after paying the expenses thereof:
1. To pay the net income thereof to the settlor during her lifetime.
2. Upon the death of the settlor, to pay the trust estate to the descendants of the settlor her surviving, share and share alike per stirpes and not per capita. If there be no such descendants the settlor surviving, the trustee shall pay the trust estate to Estelle Goldstein, mother of the settlor, and if she be dead, to such persons as shall be named in the last will and testament of the settlor and in default of such nomination to the heirs at law of the settlor.
SECOND: The trustee shall accept as a part of the trust estate and hold, subject to the provisions of this indenture, any securities or other property which the settlor or any one for her account may hereafter at any time or times deliver to the trustee with instructions in writing to hold the same subject to the provisions of this indenture.
SEVENTH: The settlor shall have the right to modify or cancel this trust indenture, only with the consent of the trustee or of any substituted trustee and not otherwise. Such modification or cancellation and such consent must be in writing, executed by the respective parties thereto.
EIGHTH: In case of the death or disability of the Trustee Estelle Goldstein, Carrie Frank of Elberton, New Jersey, shall be substituted trustee hereunder upon her acceptance of the terms and conditions of this trust indenture. In case of the death or disability of said CARRIE FRANK, the settlor shall have the right to designate one or more substituted trustees.
Under date of October 24, 1938, Carolyn (who was then married to Hammond E. Fisher), as settlor, and Estelle Graham, as trustee, entered into an amendment to the indenture of trust made on April 22, 1932, the pertinent provisions of which were as follows:
Article First of said trust indenture of April 22, 1932 is hereby amended to read as follows:
That the settlor has transferred, assigned and delivered, and does hereby transfer, assign and deliver unto the trustee the property and assets enumerated in the Schedule annexed hereto and marked Schedule ‘A’, TO HAVE AND TO HOLD the same and any other securities or property of any kind which may be delivered to the trustee, pursuant to the provisions of Article II hereof, (all of which are hereinafter referred to collectively as ‘the trust estate’), unto the trustee, her successors and assigns, IN TRUST NEVERTHELESS, for the following uses and purposes:
To hold, invest and reinvest the principal of the trust estate; to collect and receive the dividends, interest, income, revenue and profits thereon and therefrom, and after paying the expenses thereof:
(1) To pay the net income thereof to the settlor during her lifetime; if in any one calendar year during the lifetime of said Estelle Graham, the income to which the settlor shall be entitled hereunder shall be less than $7500, then to the extent of such deficiency the settlor shall be entitled to demand and receive a share of the principal of said trust estate; if in any one calendar year after the death of said Estelle Graham, the income to which the settlor shall be entitled hereunder shall be less than $15,000, then to the extent of such deficiency, the settlor shall be entitled to demand and receive a share of said principal of the trust estate. In the event that the said Estelle Graham shall die during any calendar year, the said deficiency, if any, for that calendar year, shall be adjusted pro rata between the aforesaid sums of $7500 and $15,000.
(2) Upon the death of the settlor to pay the income thereof to Estelle Graham, mother of the settlor during her lifetime.
(3) Upon the death of the settlor and of Estelle Graham to pay said trust estate to the children of the settlor who survive both the settlor and said Estelle Graham and to the issue of any child of the settlor who may have predeceased the settlor or Estelle Graham, and which issue of such deceased child survive both the settlor and Estelle Graham, per stirpes and not per capita.
(4) If the settlor shall die leaving no issue her surviving then in lieu of the life estate provided for under subdivision (2) hereof, the trustee shall pay said trust estate or the balance of the principal thereof, as the case may be, to Estelle Graham, absolutely, if she be then surviving.
(5) If Estelle Graham be not then living, the trustee is to pay said trust estate or share of the principal, as the case may be, in any such manner as may be directed in the said settlor's last will and testament.
Article SEVENTH of said trust indenture of April 22, 1932, is hereby amended to read as follows:
This trust indenture and the trusts herein created are and at all times shall be irrevocable, and shall not be modified in any way with the following express exception: The settlor may, with the consent of the trustee, change the provisions of Article FIRST, subdivisions 2, 3 and 4 hereof, to the extent that in lieu of the distribution of the trust estate of the settlor as therein provided, the settlor may provide that the said trust estate be payable to the issue of the settlor, or any of them, her surviving in such shares and in such manner as she may from time to time determine. Such modification to be effective must be in writing duly executed by both the settlor and the trustee.
Article EIGHTH of said trust indenture dated April 22, 1932, is hereby amended to read as follows:
(1) In the event of the death of the trustee Estelle Graham, or of her ceasing to act, or in the event of her disability to act as such trustee, then the said Carolyn Fisher and Daniel G. Ross, presently residing at 6 West 77th Street, Borough of Manhattan, City and State of New York, are hereby appointed successor trustees hereunder.
(2) In the event of the death of Carolyn Fisher, or of her ceasing to act, or in the event of her disability to act as such trustee, the said Daniel G. Ross shall be the sole successor trustee hereunder.
(3) In the event of the death of Daniel G. Ross, or of his ceasing to act, or of his disability to act as such trustee, then his successor trustee shall be such person as he may appoint by instrument duly executed by him. Such successor trustee and each successor trustee thereafter shall be empowered to appoint his successor by instrument duly executed by him.
(4) No bond shall be required of the trustee or of any successor trustee or trustees hereunder anywhere for the performance of any of their duties.
(5) All of the rights and powers and acts of discretion herein granted to the trustee, Estelle Graham, shall be exercised and are hereby granted to any successor trustee or trustees.
By article Fourth of the trust indenture, as amended, broad power and authority with regard to the administration and management of the trust property were granted to the trustee.
Estelle Graham resigned as trustee under the amended indenture of trust on March 15, 1943, and the petitioner and Daniel G. Ross, her attorney, were appointed as successor trustees and were still serving as such at the time of the hearing. Ross was also attorney for Estelle. He had served as attorney for Louis, Estelle, and petitioner since 1928. His interests were not adverse to those of petitioner.
The petitioner's name by her first marriage in 1928 or 1929 was Sarnoff. This marriage was subsequently annulled and when the indenture of trust was executed in 1932, the petitioner had resumed her maiden name. In 1934, subsequent to the creation of the trust, petitioner was married to Hammond E. Fisher and was divorced from him in 1943. She had one child by him, a daughter named Wendy, who was about 6 months old when the amendment to the trust indenture dated October 24, 1938, was executed. As of the date of the trial herein, petitioner has had no issue other than Wendy. Fisher, who was a successful cartoonist, is now dead but, by his will, made very substantial provision for Wendy. Petitioner has never contributed to her support. There is communication but not actual visiting between petitioner and Wendy who is living with her governess. Carolyn married Hiram Solomon in about 1947 or 1948, remaining married to him until he died in 1950. In 1953 Carolyn remarried and her married name is now Carolyn Manson.
Ross and Carolyn, after they became co-trustees, controlled the management and investment of the trust funds but, as a practical matter, Carolyn relied for the most part upon Ross to make the decisions. No bond was required of Ross as trustee.
The trustees of the Carolyn Solomon Trust duly filed a fiduciary income tax return for the years 1950 in the third New York collection district. On this return a net capital gain in the amount of $20,949.30 was reported, of which $10,474.65, or 50 per cent, was included in the taxable income of the trust, and a tax of $2,515.96 was paid thereon by the trust. No part of this capital gains was distributed to petitioner. All of the other net income of the trust in the amount of $27,367.86 was shown on the trust's return for 1950 as distributable to the beneficiary, and was included by Carolyn in the joint return she filed for that year.
As of January 1, 1950, and December 31, 1950, the corpus of the trust consisted entirely of marketable securities. The value of the trust assets as of January 1, 1950, was $293,446.63, and the value of these assets as of December 31, 1950, was $385,658.88. The cost of the trust assets as of January 1, 1950, was $220,364.77, and the cost of these assets as of December 31, 1950, was $240,562.49.
As of January 1, 1950, the value of the assets in the estate of Louis Goldstein was $478,372.26, and the value of these assets as of December 31, 1950, was $596,681.75. The cost of the assets in the estate of Louis Goldstein as of January 1, 1950, was $356,181.34, and the cost of these assets as of December 31, 1950, was $357,236.63.
The net incomes of the Carolyn Solomon Trust and the estate of Louis Goldstein for the years 1938 to 1954, inclusive (excluding gains and losses), were as follows:
+------------------------------------------+ ¦ ¦Carolyn Solomon ¦Estate of ¦ +------+-----------------+-----------------¦ ¦Year ¦Trust ¦Louis Goldstein ¦ +------+-----------------+-----------------¦ ¦1954 ¦$29,244.09 ¦$42,554.19 ¦ +------+-----------------+-----------------¦ ¦1953 ¦27,435.63 ¦38,299.56 ¦ +------+-----------------+-----------------¦ ¦1952 ¦27,887.22 ¦39,525.05 ¦ +------+-----------------+-----------------¦ ¦1951 ¦26,964.56 ¦36,562.56 ¦ +------+-----------------+-----------------¦ ¦1950 ¦27,367.86 ¦42,341.56 ¦ +------+-----------------+-----------------¦ ¦1949 ¦20,857.23 ¦32,660.66 ¦ +------+-----------------+-----------------¦ ¦1948 ¦19,230.57 ¦28,458.18 ¦ +------+-----------------+-----------------¦ ¦1947 ¦17,330.45 ¦24,622.36 ¦ +------+-----------------+-----------------¦ ¦1946 ¦13,641.64 ¦21,944.51 ¦ +------+-----------------+-----------------¦ ¦1945 ¦12,687.77 ¦21,034.82 ¦ +------+-----------------+-----------------¦ ¦1944 ¦10,862.65 ¦22,248.84 ¦ +------------------------------------------+
+------------------------------------------+ ¦ ¦Carolyn Solomon ¦Estate of ¦ +------+-----------------+-----------------¦ ¦Year ¦Trust ¦Louis Goldstein ¦ +------+-----------------+-----------------¦ ¦1943 ¦11,292.25 ¦26,799.64 ¦ +------+-----------------+-----------------¦ ¦1942 ¦ 11,766.73 ¦ 23,533.45 ¦ +------+-----------------+-----------------¦ ¦1941 ¦ 13,031.36 ¦ 26,062.73 ¦ +------+-----------------+-----------------¦ ¦1940 ¦ 13,020.78 ¦ FN1 One-third of combined income reported on estate fiduciary tax return. No separate return filed for trust for 1938, 1939, and 1940.FN2 Two-thirds of combined income reported on estate fiduciary tax return.
26,041.57 ¦ +------+-----------------+-----------------¦ ¦1939 ¦
12,270.04 ¦
24,540.06 ¦ +------+-----------------+-----------------¦ ¦1938 ¦
11,396.68 ¦
22,793.37 ¦ +------+-----------------+-----------------¦ ¦ ¦ ¦ ¦ +------------------------------------------+
OPINION.
KERN, Judge:
The sole question now before us for decision is whether under the somewhat peculiar facts of the instant case the petitioner, who was the settlor, life beneficiary, and co-trustee of a trust, should be taxed under section 22(a) of the Internal Revenue Code of 1939 on the capital gains, which were realized by that trust in 1950 and which were neither distributed nor distributable to her as such life beneficiary under the laws of the jurisdiction in which the trust was administered. Hutchison v. Ross, 262 N.Y. 381; In re Bank of Richmondville, et al., 259 App.Div. 4, affd. 284, N.Y. 671.
The respondent determined that such capital gains were taxable to the petitioner because she retained under the terms of the trust indenture such control over the trust corpus as to be the substantial owner thereof for income tax purposes under the principle set forth in Helvering v. Clifford, 309 U.S. 331. Specifically, the respondent points to the following incidents of ownership retained by the taxpayer: (1) The retention of the life interest to trust income; (2) the right to invade the corpus if the yearly income was ever less than $7,500 during her mother's lifetime or less than $15,000 after her mother's death; (3) the right to become co-trustee with her own attorney in the event of the resignation of the designated trustee who was her mother; (4) the power to provide, with the consent of herself and Ross, as co-trustees, that ‘the said trust estate be payable to the issue of the settlor, or any of them, her surviving in such shares and in such manner as she may from time to time determine’; and (5) the right of ultimate disposition after the death of Estelle ‘in any such manner as may be directed in the said settlor's last will and testament.’
The petitioner contests the validity of the respondent's determination and argues that she neither received the particular capital gains nor did she derive any economic benefit from any of the rights or powers reserved to her in the trust indenture, since those powers and rights were so limited as to be of no significance in the taxable year involved. The petitioner cites, among other authorities, the cases of Commissioner v. Bateman, (C.A. 1, 1942) 127 F.2d 266, affirming 43 B.T.A. 69, and May Chandler Goodan, 12 T.C. 817 (further hearing at 8 T.C.M. 1119, Par. 12.110 P.-H.T.C. 1949), affd. 195 F.2d 498 (C.A. 9, 1952), both cases involving the question of whether undistributable income of a trust was taxable to the trust or to its grantor.
Our problem is to consider whether ‘the benefits directly or indirectly retained by the grantor blend so imperceptibly with the normal concept of full ownership, that the grantor after the trust had been established may still, for tax purposes, be treated as the owner of the corpus.’ Commissioner v. Bateman, supra. The answer to this question ‘must depend on an analysis of the terms of the trust and all of the circumstances attendant on its creation and operation.’ Helvering v. Clifford, supra. Each case must rest on its own peculiar facts and circumstances. Harold F. Jones, 6 T.C. 412.
Many of the provisions of the trust instruments pointed to by respondent in his argument might properly be considered by us as factors in determining whether the nondistributable income of the trust should be taxable to the settlor under the doctrine of the Clifford case, but, as that case itself admonishes us, we must consider not only the provisions of the trust instruments but also ‘all of the circumstances attendant on (the trust's) creation and operation.’
We point out and emphasize the obvious fact that the trust in the instant case was not created by petitioner for the purpose of segregating a superfluous part of her fortune in order to accumulate at lower tax rates the means of bestowing financial benefits upon beloved or dependent members of her family. Cf. Stanley J. Klein, 4 T.C. 1195, affd. 154 F.2d 58. As respondent himself vigorously states in his brief, Carolyn's primary concern was for Carolyn and there is no suggestion that her purpose in creating or administering the trust was to accumulate nondistributable income for the purpose of benefiting anyone else, or that the addition to the corpus of the capital gains realized by the trust in 1950, required by New York law, was not unforeseen and involuntary so far as Carolyn was concerned. In this respect and considering these circumstances, the instant case is stronger for the taxpayer than Commissioner v. Bateman, supra.
We also point out that the purpose for the creation of the trust in the instant case was not to provide Carolyn with a familially eleemosynary hose through which she could sprinkle during her lifetime financial benevolences among objects of her bounty. Cf. Commissioner v. Buck, 120 F.2d 775; Louis Stockstrom, 3 T.C. 255. Even her posthumous sprinkling could only be between her mother and her issue (consisting at the time of trial herein of one daughter, Wendy). Her mother was the life tenant of two-thirds of her father's substantial estate and her daughter (with whom ‘there is communication but not actual meeting’ by Carolyn) was substantially provided for by her deceased father. Under these circumstances, we are unable to conclude that Carolyn could obtain any substantial ‘indirect satisfactions' resulting from the vicarious pleasure of the consumption of the income (or the receipt of the principal) by her mother or her issue stemming from the hypothetical exercise of any of her rights provided by the trust indenture.
Another factor to which respondent points as properly relevant to the question before us is Carolyn's right to require an invasion of the trust principal if the income of the trust distributable to her should be less than $7,500 a year prior to her mother's death and $15,000 a year after her mother's death. We have found no case in which this factor has led to the inclusion in the settlor-beneficiary's taxable income of the nondistributable income of a trust. However, in a somewhat analogous case arising under section 166 of the Revenue Act of 1934, involving the question whether capital gains of a trust required by State law to be added to corpus were nevertheless taxable to the beneficiary because of the power of the settlor-beneficiary to invade the trust principal if the trust income should be insufficient ‘for the upkeep of her home and her personal enjoyment,‘ we held that it was a power which could be exercised only upon the happening of a contingency in the nature of a condition subsequent, the occurrence of which is entirely fortuitous, and that until the contingency occurs it is no power at all or at most an incipient or inchoate power. Lewis Hunt Mills, Administrator, 39 B.T.A. 798. In the instant case Carolyn had no power to invade the trust corpus in 1950 since the distributable income of the trust exceeded $7,500 by almost $20,000. While it is possible that at some future time petitioner may have the power to invade the trust corpus, it does not appear to us to be probable. Cf. William H. Robertson, 26 T.C. 246. In the absence of authority compelling us to a contrary result, we are of the opinion that this highly speculative inchoate power does not justify the inclusion of nondistributable trust income in the taxable income of the settlor-beneficiary under the provisions of section 22(a) as interpreted in the Clifford case.
Respondent also points to the broad administrative powers which petitioner had under the trust indenture as co-trustee and contends that this also is a factor which tends to support his determination. However, this is not a case in which the trust corpus consists of securities of corporations in which the settlor-trustee is personally interested. Cf. Louis Stockstrom, supra. The corpus of this trust consisted of miscellaneous marketable securities, plus the remainder interest in two-thirds of her father's estate which was being administered by her mother. Regardless of the broad managerial and administrative powers of the co-trustees laboriously spelled out in the trust indenture, it is obvious from the testimony of Carolyn's co-trustee, Ross, that the managerial problems incident to the trust were negligible, and that the managerial powers of Carolyn as nominal co-trustee were of little practical importance.
Thus, when we analyze the terms of the trust indenture on which respondent relies as justifying his determination herein in the light of ‘all the circumstances attendant upon its creation and operation,‘ we are unable to conclude that ‘the benefits directly or indirectly retained by the grantor blend so imperceptibly with the normal concept of full ownership, that the grantor after the trust has been established may still, for tax purposes, be treated as the owner of the corpus.’
Decision will be entered for petitioners.