Opinion
Docket No. 2775-74.
1976-02-5
ROBERT L. MOODY TRUST UTI 6/13/60, IRWIN M. HERZ, JR., TRUSTEE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
J. Michael Wylie, Paul W. Eggers, and Jack C. Spillman, for the petitioner. John D. Copeland and Suzanne B. O'Neill, for the respondent.
Held, a trust instrument, executed by Robert L. Moody on June 13, 1960, as subsequently amended, created a separate trust for each of his children rather than a single trust for the benefit of all of them. J. Michael Wylie, Paul W. Eggers, and Jack C. Spillman, for the petitioner. John D. Copeland and Suzanne B. O'Neill, for the respondent.
FEATHERSTON, Judge:
Respondent determined the following deficiencies in petitioner's Federal income tax and an addition to tax under section 6651(a):
All section references are to the Internal Revenue Code of 1954, as in effect for the years in issue, unless otherwise noted.
+-----------------------------------------+ ¦Year ended ¦ ¦Addition to tax ¦ +------------+----------+-----------------¦ ¦May 31 — ¦Amount ¦(Sec. 6651(a)) ¦ +------------+----------+-----------------¦ ¦ ¦ ¦ ¦ +------------+----------+-----------------¦ ¦1970 ¦$18,560.10¦$2,784.02 ¦ +------------+----------+-----------------¦ ¦1971 ¦24,867.69 ¦--- ¦ +------------+----------+-----------------¦ ¦1972 ¦69,757.33 ¦--- ¦ +-----------------------------------------+
Certain other adjustments having been resolved by the parties, the only issue for decision is whether a trust instrument dated June 13, 1960, as amended on June 13, 1961, created a single trust or a separate trust for each of the settlor's four children.
FINDINGS OF FACT
At the time the petition was filed, petitioner Irwin M. Herz, Jr. (sometimes hereinafter petitioner), trustee under the Robert L. Moody Trust Indenture dated June 13, 1960, and the amendments thereto, was a legal resident of Galveston, Tex. For the fiscal years ended May 31, 1970, 1971, and 1972, petitioner filed fiduciary income tax returns with the District Director of Internal Revenue, Austin, Tex. Four returns were filed for each of these years in the names of the trusts for Robert L. Moody, Jr., Russell Shearn Moody, Ross Rankin Moody, and Frances Anne Moody, respectively.
Robert L. Moody (hereinafter Moody), who executed the indenture of June 13, 1960, as settlor, and who was designated therein as trustee, was born on July 28, 1935. When Moody's father died in 1936, his will called for the creation of a trust of which Moody was one of the beneficiaries. At the death of his grandmother, Libby Shearn Moody, in 1943, a substantial trust was established for Moody's benefit pursuant to her will. Moody's grandfather died in 1954, leaving an estate in excess of $100 million and a portion of his estate was placed in trust for Moody's benefit. Moody was also a beneficiary of a so-called trust 19 created by his grandfather and trust 25 established by his great-grandfather, as well as several other trusts.
On January 20, 1960, Moody's wife gave birth to their first child, Robert L. Moody, Jr. Shortly thereafter Moody decided to make a transfer in trust for the benefit of his son and his future children and their descendants. In reaching this decision, he was conscious of the large amount of bitter litigation which had been carried on among the several Moody heirs as to the nature and extent of the rights in trusts created by various members of the Moody family. The trust instrument was drafted by Moody's lawyer and reviewed by his accountant.
On June 13, 1960, Moody signed the Robert L. Moody Trust Indenture, designating himself as trustee, and funded the trust with 4,000 shares of American National Insurance Co. common stock. The designated beneficiaries were ‘the children of the Donor living at the time thereafter’ and, on stated conditions, the surviving children, per stirpes, of each child of the donor. The trust instrument described the interest of each child as his ‘part’ or ‘share’ in the trust estate.
On April 4, 1961, a second son, Russell Shearn Moody, was born to Moody and his wife. A question arose as to whether the trust instrument, in providing for Moody's children born after the June 13, 1960, instrument was signed, created a single trust or a trust for each of his children. Moody was advised that the instrument was susceptible to either interpretation. On June 13, 1961, Moody executed an amendment to article IV of the trust instrument. One of the introductory clauses of the amendment recited:
AND WHEREAS, the parties thereto have concluded that it is necessary and proper to amend Article IV of said Indenture of Trust so as to more clearly define the Estates and Trusts created and the person and/or persons to benefit therefrom so as to provide for a more convenient and efficient administration of the Trust Property by the Trustees.
Article IV of the amended instrument, headed ‘Beneficiaries,‘ provides:
During the lifetime of the Donor the Trustee shall hold the Trust Property together with all accumulated income thereon for the benefit of the children of the Donor living at the time of the creation of this trust or born to the Donor at anytime thereafter, and Trustee shall from time to time and not less than annually divide and redivide the Trust Property into equal parts or shares of such a number that one of such equal parts or shares may be held for the benefit of each child of the Donor then living and that one of such equal parts or shares may be held per stirpes for the surviving children of each child of the Donor who may have died prior thereto.
Upon the death of the Donor or within one (1) year thereafter the Successor Trustee shall thereupon hold one of such shares for the benefit of each child of the Donor then living and shall pay over in equal parts per stirpes to the surviving children of each child of the Donor who may have died prior thereto the part of share of the Trust Property held for such surviving children. Should any child of the Donor, for whose benefit the Trustee and/or Trustees may thereafter hold a part or share of the Trust Property hereunder die while such part of share of the Trust Property is held for his or her benefit the part or share of the Trust Property then held for the benefit of such deceased child of the Donor shall thereupon be paid by the Trustee and/or Trustees per stirpes to the then living children of such deceased child of the Donor, provided, however, that should any such child of the Donor die and leave surviving no child or children then and in that event the part or share of the Trust Property held by the Trustee and/or Trustees hereunder for the benefit of such deceased child of the Donor shall thereupon be divided into equal parts or shares of such a number that one of such equal parts or shares may be held for the benefit of each child of the Donor then living and that one of such equal parts or shares may be paid per stirpes to the then surviving children, if such there be, of any child of the Donor who shall have died prior thereto and left surviving him or her a child or children. In any event in which the surviving children of any deceased child of the Donor shall become entitled to any distribution of any part of share of the Trust Property hereunder and any such child shall not have obtained his majority. The Moody National Bank of Galveston shall be and become the Trustee of such part or share until such beneficiary shall have become of legal age. If at the death of the Donor, there should be living no child or children of the Donor and no surviving children of any deceased child of the Donor, then and in that event the Trust Property then held by the Trustee and/or Trustees hereunder shall be paid over and delivered to the then surviving wife of the Donor if such there be and the Trust or Trusts herein created shall terminate, provided however, should there be no surviving wife of the Donor Robert L. Moody, then and in that event all of the then Trust Property shall be paid over and delivered to the Trustees of the Robert L. Moody Charitable Trust and the Trust or Trusts herein created shall terminate.
Article V of the trust instrument, headed ‘Payments to Beneficiaries,‘ states that during Moody's lifetime all income from the trust property shall be accumulated. The trustees are given the power, however, to pay to a beneficiary ‘for whose benefit a part or share? of the trust property is being held, sums necessary for the beneficiary's health or education or to meet any emergency condition. The beneficiary may not receive such sums unless he or she is unable to secure the funds from any other source.
After Moody's death, those of Moody's children who have attained the age of 21 shall receive all income ‘from any part or share of the Trust Property held for * * * (their) benefit.’ Income will accumulate and continue to be held by the trustee for those children who have not attained their majority.
The trust instrument originally named Moody as trustee. On September 8, 1969, he resigned and a successor was designated. Article III, concerning trustees, as effective during the years at issue, gave Moody the power to appoint successor trustees. Upon Moody's death, the instrument provides as follows:
each child of the Donor for which a share be held in Trust upon reaching the age of 25 years shall succeed any then Trustee of that share held for his or her benefit, provided however, that said child shall have the right of resignation and appointment thereafter, in the event said child does not desire to act as Trustee of said Trust estate.
The trust was irrevocable and Moody reserved only a limited power of amendment. Article X provides that Moody cannot revoke in whole or in part this ‘Indenture or the Trust or Trusts existing hereunder.’
For the taxable year ended May 31, 1962, two fiduciary income tax returns were filed— one in the name of ‘Robert L. Moody Trust under Trust Indenture Dated 6/13/60 for Robert Lee Moody, Jr.‘ and the other in the name of ‘Robert L. Moody Trust under Trust Indenture Dated 6/13/60 for Russell Shearn Moody.’
On October 3, 1962, a third son, Ross Rankin Moody, was born to Moody and his wife. In each of the taxable years ended May 31, 1963, through May 31, 1969, three separate fiduciary income tax returns were filed— one in each of the two names listed in the immediately preceding paragraph and one in the name of ‘Robert L. Moody Trust under Trust Indenture Dated 6/13/60 for Ross Rankin Moody.’
On July 8, 1969, a daughter, Frances Anne Moody, was born to Moody and his wife. A separate fiduciary return was filed for a trust in her name and trusts in the names of each of Moody's three sons for the fiscal years ended May 31, 1970, 1971, and 1972.
All the fiduciary returns described above were prepared by the accountant who advised Moody on the creation of the trust. All the returns for the years ending May 31, 1961, through May 31, 1968, were signed by Moody as trustee.
During the taxable years ended May 31, 1961, through the taxable years in issue, the trustee did not maintain separate books and records in the name of each beneficiary. Investment proceeds and other income accumulations were not divided on the books and records into separate shares for each beneficiary. Similarly, a single bank account was maintained by the trustee during the entire period. No distributions of either corpus or income have been made to any beneficiary since the signing of the original trust instrument on June 13, 1960, through the taxable years in issue. Moody's personal wealth approximates at least $10 million and it has been sufficient to meet the needs of his children.
OPINION
Neither section 641(a), which declares that the income tax shall apply to the ‘taxable income of estates or of any kind of property held in trust,‘ nor section 641(b), which provides that the tax on the ‘taxable income of an estate or trust’ shall be paid by the fiduciary, nor any other Code section gives any guidance as to whether income from the ‘property held in trust’ in this case is to be taxed as earned by one trust, or by several. The issue is basically factual. Its answer depends upon the settlor's intent, and his intent is to be gleaned from the language used in the trust instrument. U.S. Trust Co. v. Commissioner, 296 U.S. 481 (1936); McHarg v. Fitzpatrick, 210 F.2d 792, 794 (2d Cir. 1954); Commissioner v. McIlvaine, 78 F.2d 787, 788-789 (7th Cir. 1935), affd. 296 U.S. 488 (1936); State Sav. Loan & Trust Co. v. Commissioner, 63 F.2d 482, 484 (7th Cir. 1933), affg. 25 B.T.A. 228 (1932); Nora Grace Trust, 13 T.C. 632 (1949).
The task of determining whether one or several trusts have been created is difficult because, save for the tax realm, it normally makes little difference. In the instant case, further difficulty stems from the fact that no distributions from the trust are likely until the donor's death and from the intractable ambiguity of the trust instrument itself. Certain provisions of the trust instrument seem to create a single trust with multiple beneficiaries. Some provisions support both conclusions. In these circumstances, it is necessary not only to examine the instruments in their entirety but to consider the facts and circumstances surrounding the execution of the several instruments and the practical construction given the instruments by the trustees. These factors are considered not for the purpose of varying the terms of the instruments but for the purpose of seeking an explanation of the meaning of the terms used by the settlor in expressing his intent. Buhl v. Kavanagh, 118 F.2d 315, 321 (6th Cir. 1941); San Diego Tr. & Svgs. Bk. v. United States, an unreported case (S.D. Cal. 1971, 28 AFTR 2d 71-5526, 71-2 USTC par. 9518).
While the issue is a close one, we think Moody created a separate trust for each of his children. Moody's testimony shows an unequivocal intention to do this. The only question is whether the trust instrument accomplished this purpose. U.S. Trust Co. v. Commissioner, supra; McHarg v. Fitzpatrick, supra.
Moody executed the original trust indenture on June 13, 1960, shortly after the birth of his first child. Consistent with his Family's tradition, he employed the trust as a vehicle for administering and passing his wealth to succeeding generations and providing financial security for his offspring. After the birth of his second child, however, Moody became concerned that the original instrument did not clearly reflect his desire to create a separate trust for each child. Hence, article IV of the original agreement
was amended ‘to more clearly define the Estates and Trusts created and the person and/or persons to benefit therefrom.’
The relevant part of the original art. IV is as follows:‘During the lifetime of the Donor the Trustee shall hold the Trust Property together with all accumulated income thereon for the benefit of the children of the Donor living at the time of the creation of this Trust or born to the Donor at any time thereafter and upon the death of the Donor or within one (1) year thereafter the then acting Trustee and/or Trustees hereunder shall divide the Trust Property into equal parts or shares of such a number that one of such equal parts or shares may be held for the benefit of each child of the Donor then living and that one of such equal parts or shares may be paid per stirpes to the surviving children of each child of the Donor who may or shall have died prior thereto.’This article could have been construed to create separate trusts only upon Moody's death despite other references to the ‘Trusts' and ‘parts or shares' contained in other articles, see text infra.
Since petitioner relies primarily on article IV, we shall begin analysis of the trust instrument with it. Article IV, quoted in full in our Findings of Fact, provides that the trustees shall hold the trust property and accumulated income for the benefit of Moody's living and subsequently born children. The trustee was directed ‘from time to time and not less than annually (to) divide and re-divide the Trust Property into equal parts or shares' so that one part or share ‘may be held for the benefit of each child of the Donor then living’ and one part of share may be held per stirpes for the offspring of each of Moody's deceased children. In the case of the death of one of Moody's children, the article does not provide for a revised division of the whole trust estate among Moody's other children, but rather calls for that child's share to be held for the then-living offspring of such deceased child and, only if there are none, for a division of that child's share and for its addition to the shares of the other children. All of these provisions manifest an intention to treat each child's share separately.
Within 1 year after Moody's death, the successor trustee is to pay over to the children of any deceased child of the donor the share of the trust property held for their benefit. The remaining shares are to be held for the benefit of Moody's surviving children. Significantly, if any of the surviving children of any deceased child of the donor become entitled to a distribution of their share of the property and they have not obtained their majority, that part or share is to be held for his or her benefit, with the Moody National Bank of Galveston serving as trustee, until he or she reaches the age of 21.
Under article III,
as amended, Moody retained the power to appoint successor trustees. After Moody's death each of his children who have reached the age of 25 ‘shall succeed any then Trustee as Trustee of that share held for his or her benefit.’ However, each such child shall have the power to resign and appoint another trustee if the child ‘does not desire to act as Trustee of said Trust Estate.’
Under the original trust indenture Moody named himself trustee and his then wife, Edna Moody, his successor. After their separation and divorce, the instrument was amended several times until its form was reached on Sept. 8, 1969.
Article V concerns payments to the beneficiaries. Until Moody's death all income is to be accumulated. However, the ‘Trustee may from time to time pay over to any beneficiaries * * * for whose benefit a part or share of the Trust Property is being held’ sums necessary for health or education. Upon the donor's death, all income from any part or share held for the benefit of a child of the donor shall be paid to him if he has reached the age of 21. Until such time, the trustee shall continue to accumulate the income which shall be paid over upon the child's attaining the age of 21.
The trust instrument, as well as the preamble to the amendment quoted above, contain several references to the ‘Trust or Trusts' created thereunder. True, the majority of the references to the trust are in the singular. We think this ambiguity is understandable, since at the time the original trust indenture was executed Moody had only one child and he could not be sure how many children he would eventually produce. On June 13, 1960, however, there was only one child and therefore one trust.
We think a fair reading of the instrument as a whole, and particularly the language of article IV, reflects an intention that each ‘part or share’ was to be a separate trust for each child. Otherwise, there would have been no occasion for the use of the plural terms ‘trusts' and ‘estates' referred to above. The preamble to the amendment of article IV also demonstrates this intention. Moreover, myriad configurations of interests result from the trust instrument. Some shares will be paid out in their entirety, while others remain in trust; some beneficiaries will receive income while others' remain in trust; some beneficiaries will receive income while others' income accumulates; some children will become the trustee of their part while others will not; some parts may be held by the Moody National Bank while others are held by Moody's children as trustees. These divisions directed in certain articles, as well as the annual division contemplated in article IV, militate in favor of the conclusion that each part constitutes a separate trust.
Consistent with this conclusion, separate fiduciary returns for a trust for each child have been filed each year since the birth of Moody's second son. Since Moody was the settlor, as well as the trustee, who filed those returns for each of the taxable years May 31, 1962, through May 31, 1968, the inference is clear that he intended to create, and thought each share or part was, a separate trust. This practical construction of the trust instrument by the settlor is ‘of great significance in construing an ambiguous trust instrument.’ Helfrich's Estate v. Commissioner, 143 F.2d 43, 46 (7th Cir. 1944), affg. 1 T.C. 590 (1943); Estelle Morris Trusts, 51 T.C. 20, 36 (1968), affd. per curiam 427 F.2d 1361 (9th Cir. 1970); cf. McHarg v. Fitzpatrick, supra at 794. See also MacManus v. Commissioner, 131 F.2d 670, 673 (6th Cir. 1942), revg. 44 B.T.A. 508 (1941); Huntington Nat. Bank v. Commissioner, 90 F.2d 876, 878-879 (6th Cir. 1937), affg. 32 B.T.A. 342 (1935).
It is true that, notwithstanding the explicit provision of article IV that the trust corpus and income be divided into separate parts, the corpus has been administered as a single fund. The same was true in U.S. Trust Co. v. Commissioner, supra, where the Court said (296 U.S. at 486-487):
If the various securities had been divided physically, if new certificates of stock had been obtained for the several beneficiaries, and such certificates and specific bonds and cash had been set aside for each, there would be no room for argument that three separate trusts were not created. But it was not necessary to have such a physical division in order to carry out the clear intention of the parties. An undivided interest in property may constitute the corpus of a trust. * * * Where there is an intention to create separate trusts, the fact that ‘the trusts' are ‘kept in one fund’ does not necessarily defeat the intention and require the conclusion that there is but a single trust. * * * where ‘income and principal were given in equal shares, although out of one fund kept in solido for convenience of investment, a severance of the trust into its component parts has been adjudged. * * * The shares and interests are several, although the fund remains undivided.’ * *
In the instant case, there was simply no reason to make a physical division of the trust property or to set up separate bank accounts. To divide the trust assets and maintain four separate sets of books would have been a needless expense. The accountant for the trusts explained that he could easily determine at any time the precise amount in each trust by dividing the total book or fair market value of the trust property by four. This same procedure was evidently followed in computing each year's taxable income of each trust for the purpose of filing the separate fiduciary income tax returns. No distributions were to be made until Moody's death— with the limited exception of funds necessary for the health and education of a beneficiary of a part or share. However, a distribution for those purposes may be made only if the funds cannot be obtained from any other source. Moody is an extremely wealthy individual, and there is little likelihood that his children will have to resort to the trust funds for money. We do not think the trustee's technical failure to comply with the direction of the trust instrument militates against our conclusion. Commissioner v. McIlvaine, 78 F.2d at 790; Kohtz Family Trust, 5 T.C. 554, 556-557 (1945).
Nor do we think the provisions of article IV of the trust instrument allowing Moody's after-born to share equally in the trust with other beneficiaries require the conclusion that the interests of the respective beneficiaries were so interdependent that only one trust was created. See Commercial Bank at Winter Park v. United States, 450 F.2d 330, 331 (5th Cir. 1971), and San Diego Tr. & Svgs. Bk. v. United States, supra, where the courts so concluded with respect to the trust instrument before them. This factor is but one of many to be weighed in the balance.
Respondent contends also that article V shows that the interests of the beneficiaries were not independent in authorizing distributions for the health, physical well-being, education, or emergencies of any beneficiary. However, the authority is given to make such distributions ‘to any beneficiaries of this Trust for whose benefit a part or share of the Trust Property is being held.’ We think the use of the plural word ‘beneficiaries' was inadvertent since the remainder of the clause refers to ‘a part or share’ and the proviso limits the authority to such payments as are necessary or required by ‘said beneficiary and cannot be secured from any other source.’ We agree with petitioner that any distribution pursuant to this provision would be charged against the separate trust created for the recipient.
Article V also contains a provision that on the 21st anniversary of Moody's death, the death of his wife at the time of the trust instrument's execution, or any child in being at the time of such execution, ‘all rights, titles, interests and benefits in and to the Trust Property shall unconditionally vest’ in the persons then living and designated as beneficiaries. Respondent argues that this provision shows that separate trusts were not created since this language implies that no prior vesting was intended. We agree with petitioner that this provision was inserted as precautionary provision to avoid a possible violation of the rule against perpetuities. It provides little guidance in resolving the issue here presented.
We hold that the trust instruments here in question created a separate trust for each one of Moody's four children. To reflect the disposition of other issues,
Decision will be entered under Rule 155.