Opinion
Docket No. 5085.
1946-01-17
ALMA M. MYER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Stanley S. Waite, Esq., and H. M. Stolar, Esq., for the petitioner. Loyal E. Keir, Esq., for the respondent.
Petitioner was the settlor-trustee of a trust created for the benefit of her son. As trustee she had broad managerial powers and the right to distribute or accumulate the income until the beneficiary reached the age of 30 years, at which time the accumulated income as well as the corpus of the trust was distributable to him. Held, no part of the income of the trust is taxable to petitioner under section 22(a), Internal Revenue Code. J. M. Leonard, 4 T.C. 1271, and cases cited therein. Stanley S. Waite, Esq., and H. M. Stolar, Esq., for the petitioner. Loyal E. Keir, Esq., for the respondent.
This proceeding seeks redetermination of deficiencies in income tax for the years and in the amounts as follows:
+---------------+ ¦1938 ¦$497.09 ¦ +-----+---------¦ ¦1939 ¦564.18 ¦ +-----+---------¦ ¦1940 ¦1,219.32 ¦ +-----+---------¦ ¦1941 ¦4,020.82 ¦ +-----+---------¦ ¦Total¦6,301.41 ¦ +---------------+
The sole issue is whether certain income of a trust, to the extent derived from property contributed thereto by petitioner, is taxable to petitioner under the provisions of section 22(a).
FINDINGS OF FACT.
Petitioner, an individual residing in Clayton, Missouri, filed her returns for the taxable years in question with the collector of internal revenue for the first district of Missouri.
In 1932 petitioner orally created an irrevocable trust for the benefit of her son, Leo A. Drey, and thereafter on December 19, 1934, reduced its provisions to writing. In its preliminary declarations the written trust agreement recites the transfer of various items of cash and securities to the trust by petitioner and her parents and by an aunt of petitioner's son, and that the property, or its accumulations, except that used for the payment of premiums on the son's life insurance, was now held in trust by her. The list that followed consisted of some $5,000 cash and numerous Federal, state and municipal bonds. The agreement further recited that petitioner was transferring other property to herself as trustee, such property being listed and comprised of
foreign, railroad, and industrial bonds.
The trust provided in part as follows:
1. To take and hold the legal title to all the property given to me, in the manner above stated, and any other property of any character, real, personal or mixed, that may be received by me, in any manner, under the terms hereof (property now held by me, under the terms hereof, above described in Schedules A and B), and to exercise the exclusive management and control of all such property, designating myself as such trustee so far as convenient to me, it being understood that my failure to designate myself as such trustee in any matter or thing, or in taking or holding the title to any such property shall, in no manner, be a breach of this trust, and that I may so designate myself at my discretion. I shall at all times keep full and proper books of account and records of my transactions as such trustee, and the property held by me as such trustee, and, so far as practicable, shall keep and hold the trust bonds, certificates of stock and other investments in the separate receptacle or package, properly marked, and provided by me for that purpose.
(a) To sell, assign, transfer, convey, exchange, pledge, mortgage, lease or otherwise dispose of, conditionally or absolutely, at public or private sale, and on such terms and for such consideration as I think proper, the whole or any part of the property belonging to the trust in whatever state of investment the same may be, and receive and compel payment of all rents, profits and income, of every character, arising therefrom, and of all other claims of said estate and rights and demands and indebtedness due said estate.
(b) To pay out and expend such part of the net income for the use and benefit of my son Leo A. Drey as I, in my sole discretion, shall deem proper and in such manner and for such purposes as I shall deem proper; to hold and accumulate any unexpended part of the net income until the time hereinafter stated.
(c) To invest the proceeds of sales of trust property or other moneys belonging to the trust, including all surplus of income after expenses, in such manner and in such property as to me may seem best, without any restriction as to the manner or form of investment, or the property in which the funds of said trust shall be invested.
(f) To borrow money for the purchase of property or for other purposes of the trust, and to give notes, make contracts or enter into other obligations therefor, and to pledge or mortgage the property of the trust, or any part thereof, to secure such notes, contracts and obligations.
(g) To vote in person or by proxy, in my discretion, at all times and on all occasions, upon all shares of stock belonging to the trust.
(h) And generally, in all matters not hereinbefore specified, to deal with the trust property and to manage and conduct the trust hereof, in any manner that I shall deem for the interest of the trust beneficiaries, as fully as if I were the absolute owner of the trust property; and to execute and make all contracts, deeds, transfers and other instruments necessary and proper in the exercise of any or all of the aforesaid powers.
It was also provided that petitioner should not be required to give bond; that when the beneficiary became 30 the trust was to terminate and all trust property was to be his absolutely; that should he die before reaching 30 the trust property was to be paid to his children, if any, upon their attaining the age of 21; that during the child's minority petitioner could pay such part of the net income as she deemed necessary or proper for his education, comfort, maintenance, or support; that if the son died before reaching 30, leaving no children, the trust was to be paid and distributed in accordance with the direction of his last will, or failing which, in accordance with the direction of the petitioner's last will; that, if the son by reason of illness or misfortune needed help, authority was given to use as much corpus in addition to income as was necessary, except that corpus in amount in excess of $5,000 was not to be distributed in any one calendar year. The trust instrument had a spendthrift provision. Petitioner reserved the power by writing or by her last will to appoint a successor trustee, who was to have the trust upon the terms and conditions stated in the instrument. Such designated trustee in turn had the right to designate his successor.
As of the date of the integration of the trust agreement the approximate value of the property transferred by petitioner to the trust was $140,000. Subsequent gifts by petitioner to the trust were of the approximate value of $59,000. Petitioner made and filed gift tax returns with respect to the gifts whenever such returns were required by law.
Petitioner has acted as trustee from the date of the creation of the trust to the present time and has received no compensation for her services.
Petitioner was born on May 23, 1890. She married Leo A. Drey, Sr., on April 16, 1916, and Leo A. Drey, the above named beneficiary, was born on January 19, 1917. Leo A. Drey, Sr., died December 22, 1920, as a result of an accident, and by the terms of his will left to petitioner his net estate, approximating $300,000. The principal asset of the estate consisted of stock in the Schramm Glass Co., upon the liquidation of which in 1925 petitioner received about $900,000. Petitioner married Max W. Myer in 1926, and has been married to him ever since.
Leo A. Drey is the only child of petitioner and is not married. Except when he was away at college, he lived at home with petitioner until 1941, when he became a member of the armed forces. He has not been adopted by Myer. Petitioner felt that her first husband would have wanted her to make adequate provision for their son out of the substantial estate he had left to her.
Petitioner's personal net worth on December 19, 1934, and for a number of years prior thereto and since has averaged approximately $1,000,000. Her estate has been invested principally in municipal bonds. Since 1925 her income has averaged in excess of $35,000 annually, of which $20,000 to $30,000 was from tax-exempt securities.
Since 1932 petitioner has kept separate books of account showing the assets, income, and disbursements of the trust in question. During 1932, and until March 1933, petitioner kept the cash of the trust in her own bank account. Thereafter such cash has been deposited in a bank account in her name as trustee.
Each year during the administration of the trust the trustee applied so much of the net income of the trust as was needed to pay the premiums on the following described policies insuring the life of Leo:
(1) Two policies issued by the Sun Life Assurance Co. of Canada on March 21, 1929. Myer applied for these policies and reserved the incidents of ownership. The annual premium on each policy was $317. They each provided for the payment of endowment proceeds in the amount of $10,000 to Leo on March 11, 1959, but in the event of his death prior thereto this sum was payable to petitioner if living; if not, to Myer or his executors, administrators, or assigns. On November 4, 1943, Myer converted one of the policies into paid-up life in the amount of $9,215, and assigned the incidents of ownership to Leo. On December 10, 1943, Leo executed a revocable request for change of beneficiary which provided that on his death the proceeds were to be payable to petitioner, if living; otherwise to Myer or to the executors, administrators, or assigns of the last survivor of petitioner, Myer, and Leo. The other policy was assigned by Myer to Leo on December 8, 1943, and on December 10, 1943, Leo effected a revocable beneficiary change comparable to the one under the other policy. On March 8, 1944, this other policy was converted into a paid-up life policy in the amount of $9,580.
(2) A policy issued by the Travelers Insurance Co. on March 8, 1937, on application of Leo, which called for the payment of 40 premiums of $502.18 per annum. The incidents of ownership were retained by Leo. On maturity of the policy in 1977 Leo, if living, will receive $21,315.28 cash, or in the event of his prior death $34,000 is payable to his executors, administrators, or assigns.
(3) A participating whole life policy issued by the John Hancock Mutual Life Insurance Co. on January 10, 1938, on application of Leo, in the face amount of $30,000, with an annual premium of $507.90. The incidents of ownership are vested in Leo, and on his death the proceeds are payable to Myer, if living; if not, to petitioner, if living; otherwise to Leo's executors, administrators, or assigns.
At no time was petitioner an officer, director, or employee of any of the corporations the securities of which were held by the trust as part of the trust property during the taxable years here involved. At no time did the trust have enough stock or other securities in any company which when added to any of the same kind of stock or securities owned individually by petitioner would be sufficient if voted by her to elect petitioner a director of any of the corporation.
With the exception of the application of portions of the net income to pay premiums on the above named insurance policies, all of the net income of the trust prior to 1938 was accumulated and invested. During three of the years here involved the trust made distributions directly to Leo in the following amounts:
+---------------+ ¦1938¦$1,282.40 ¦ +----+----------¦ ¦1939¦2,647.17 ¦ +----+----------¦ ¦1941¦4,075.02 ¦ +---------------+
During the taxable years in question the income of the trust which was not distributed to the beneficiary and not used to pay insurance premiums was accumulated in the trust. The following schedule shows the income of the trust during the taxable years from property contributed by petitioner and from property contributed by others than petitioner:
+-----------------------------------------------------------+ ¦From Property Contributed by Petitioner ¦ +-----------------------------------------------------------¦ ¦ ¦ ¦Interest ¦Capital ¦ ¦Income tax¦ +----+---------+-----------+-----------+---------+----------¦ ¦ ¦Ordinary ¦on U.S. ¦gain or ¦Total ¦paid at ¦ +----+---------+-----------+-----------+---------+----------¦ ¦ ¦income ¦obligations¦(loss) ¦ ¦source ¦ +----+---------+-----------+-----------+---------+----------¦ ¦1938¦$4,370.86¦$992.25 ¦ ¦$5,363.11¦$9.00 ¦ +----+---------+-----------+-----------+---------+----------¦ ¦1939¦5,306.04 ¦975.76 ¦($1,324.70)¦4,957.10 ¦8.35 ¦ +----+---------+-----------+-----------+---------+----------¦ ¦1940¦4,417.07 ¦958.29 ¦472.34 ¦5,847.70 ¦2.40 ¦ +----+---------+-----------+-----------+---------+----------¦ ¦1941¦4,177.84 ¦3,842.74 ¦(2,014.35) ¦6,006.23 ¦ ¦ +-----------------------------------------------------------+
From Property Contributed by Others 1938 $535.56 $252.75 $788.31 1939 2,009.18 269.24 ($19.86) 2,258.56 1940 3,128.39 93.38 (35.00) 3,186.77 1941 3,304.25 1,051.52 17.20 4,372.97
Respondent has attributed to petitioner only that part of the income derived from the property contributed by her.
During the taxable year the trust income distributed to Leo was returned by him in his individual tax returns and the income not distributed was returned by the trust in separate income tax returns. The trust adopted the calendar year basis.
None of the trust income has ever been used for the discharge of petitioner's legal obligations to support any member of her family, and such distributions as were made to Leo were reinvested for him in his own name.
OPINION.
ARUNDELL, Judge:
The petitioner asserts error on the part of the respondent in attributing to her, under section 22(a) of the Internal Revenue Code, that portion of the trust income derived from property placed in the trust by her. She contends that her gifts were complete and that even though she was trustee with wide management powers, she had no taxable interest whatsoever in the corpus or the income thereof and that she enjoyed no economic advantages as a result of her trusteeship. The respondent, in support of his determination, relies principally upon Joel E. Hall, 4 T.C. 506, and Louis Stockstrom, 3 T.C. 255 (appeal pending when the briefs were submitted). In the interim, the Stockstrom case has, in so far as here material, been affirmed, 148 Fed. (2d) 491; certiorari denied, 326 U.S. 719, and the Hall case has been reversed, 150 Fed.(2d) 304.
We are of the opinion that the petitioner should prevail. She did not enjoy the important attributes of ownership so as to warrant charging her with receipt of the income in question. Certainly Helvering v. Clifford, 309 U.S. 331, does not go so far. The Stockstrom case, supra, probably represents the furthest extension of the Clifford principles that has yet been approved, and in that case this Court fixed upon the factor that the settlor-trustee ‘was not required to distribute any part of the income to any of the beneficiaries during his lifetime.‘ Such is not the situation here. It may be true that the extent of the managerial powers here is comparable to those of the trustee in the Stockstrom case but, even so, we have uniformly held that management powers through which no economic gain may be derived are not sufficient to justify holding the settlor-trustee chargeable with the income. Estate of Benjamin Lowenstein, 3 T.C. 1133; Lura H. Morgan, 2 T.C. 510; David Small, 3 T.C. 1142; Herbert T. Cherry, 3 T.C. 1171; W. C. Cartinhour, 3 T.C. 482. And see the following Circuit Courts of Appeal cases: Commissioner v. Branch, 114 Fed.(2d) 985; Jones v. Norris, 122 Fed.(2d) 6; Helvering v. Palmer, 115 Fed.(2d) 368; Armstrong v. Commissioner, 143 Fed.(2d) 700.
Here the petitioner could distribute the income at her discretion until the beneficiary reached the age of 30 years. At that time the accumulated income, as well as the corpus of the trust, became payable to him. Hence, the trust indenture fixed a time for payment of the income and distribution of the principal which permitted of no variation by the trustee. We considered almost the same situation in the light of the Stockstrom decision in J. M. Leonard, 4 T.C. 1271; in Alice Ogden Smith, 4 T.C. 573; and in connection with the trusts for the primary benefit of the children, in Alex McCutchin, 4 T.C. 1242. In each of those cases, now acquiesced in by the Commissioner, we held that the settlor-trustee was not taxable on the income of the trusts. The instant case should be accorded the same treatment. See also Hawkins v. Commissioner, 152 Fed.(2d) 221.
Reviewed by the Court.
Decision will be entered for the petitioner.
OPPER, J., dissenting: Decision of this proceeding for respondent seems to me to be compelled by Louis Stockstrom, 3 T.C. 255; affd. (C.C.A., 8th Cir.), 148 Fed.(2d) 491; certiorari denied, 326 U.S. 719, and similar authorities, particularly Joel E. Hall, 4 T.C. 506. The latter case was reversed by a divided court, 150 Fed.(2d) 304 (C.C.A., 10th Cir.), but I think we should adhere to our original view. Cf. Talbot Mills v. Commissioner, 326 U.S. 521, majority and dissenting opinions. See also Edison v. Commissioner (C.C.A., 8th Cir.), 148 Fed.(2d) 810; Funsten v.Commissioner (C.C.A., 8th Cir.), 148 Fed.(2d) 805; Stockstrom v. Commissioner (C.C.A., 8th Cir.), 151 Fed.(2d) 353; Miller v. Commissioner (C.C.A., 6th Cir.), 147 Fed.(2d) 189; Anna Morgan, 5 T.C. 1089.
It is the degree of control which is determinative; petitioner, the grantor, was vested with extremely broad power of management, and in addition the power to make or withhold payments of income. She was thus, as in Anna Morgan, supra, ‘in a position to accumulate trust income, add it to principal, and thereby succeed in changing the recipient from the income beneficiary to the remainderman * * * .‘ It does not suggest any diminution of her retained interest that she would herself be that remainderman upon her childless son's intestate death before reaching thirty. The breadth of petitioner's potential benefit from the trust is instanced by the insurance transactions. That there were not more is evidence not of a lack of control, but of an absence of desire to exercise it.
I think the determination should be sustained.