Opinion
Docket No. 6181.
1947-01-22
NATE S. SHAPERO, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Thomas G. Long, Esq., and Frank E. Seidman, C.P.A., for the petitioner. M. S. Huffaker, Esq., for the respondent.
Petitioner in 1934 created three trusts, one each for the benefit of his wife and his minor son and daughter, and reserved to himself, as cotrustee, broad managerial authority, and discretionary power to accumulate income, invade corpora, accelerate termination of the trusts, and direct the sale and fix the price of trust property. As grantor, he could remove the corporate cotrustee and amend the trusts in any way except to change the rights of enjoyment of any beneficiary. During the taxable years each of the trusts held a considerable number of shares of stock of a corporation of which petitioner was president and a director and from which he received substantial compensation for services. All corpus and accumulated income of each of the trusts for the children were to be paid to the beneficiary when he or she reached the age of 45. The trust for the wife was to last at least during petitioner's life, unless earlier terminated by him, and during that time he could distribute or accumulate the income therof. Held, petitioner is taxable on the income of each of the trusts under the principle of Helvering v. Clifford, 309 U.S. 331. Thomas G. Long, Esq., and Frank E. Seidman, C.P.A., for the petitioner. M. S. Huffaker, Esq., for the respondent.
The respondent determined deficiencies in income tax against Nate S. Shapero for the years 1940 and 1941 in the respective amounts of $19,629.10 and $24,593.56.
The only issue in controversy is whether or not petitioner is taxable on the income of three trusts created by him in 1934 for the benefit of his wife and his minor son and daughter, respectively.
FINDINGS OF FACT.
The petitioner is an individual, residing in Detroit, Michigan. His returns for the years in controversy were prepared on the cash basis and were filed with the collector of internal revenue for the district of Michigan.
In 1918 petitioner founded the Economical Drug Co. This business was operated by him for a time as a sole proprietorship and was later incorporated, with the petitioner becoming president of the corporation. In 1931 Economical Drug Co. was consolidated with Cunningham Drug Co. under the name Economical-Cunningham Drug Stores, Inc. The name was later changed to Cunningham Drug Stores, Inc. The corporation will hereinafter be referred to as Cunningham. The petitioner has always been president and a director of Cunningham. Salaries and other compensation for personal services received by petitioner in the calendar years 1940 and 1941 were reported by him on his tax returns as $44,999.92 and $59,999.92, respectively. The stock of Cunningham was listed on the Detroit and Chicago Stock Exchanges throughout the tax years here in question.
The petitioner's family consists of his wife, Ruth Bernstein Shapero, a son, Raphael August, born in 1926, and a daughter, Marianne, born October 1, 1930.
Under date of December 6, 1934, by separate instruments, the petitioner created three trusts, one each for the benefit of his wife, his son, and his daughter. Each trust was amended by a separate instrument under date of December 29, 1936. In each trust the petitioner was named as ‘individual Trustee‘ and Detroit Trust Co. as ‘corporate Trustee.‘
The trusts for the benefit of the petitioner's children were identical. Paragraph 2 of the children's trusts, as typified by the trust for the benefit of the petitioner's son, provided in part as follows:
2. The trust hereby created shall be for the use and benefit of Grantor's son, RAPHAEL AUGUST SHAPERO. The net income of the trust estate shall, during the minority of Grantor's said son, be accumulated and added to the corpus of the trust with power in the Trustees to apply out of such accumulations or the corpus a suitable sum from time to time for the maintenance and education of such minor if such minor by reason of the death or incapacity of the Grantor or of other cause whatsoever shall have no other sufficient means therefor and with power in the individual trustee during his lifetime to direct the paying out of any such accruing or accumulated income for the benefit of such minor in any way which the Grantor as parent of said minor is not under obligation in law to provide. From and after the time Grantor's said son, RAPHAEL AUGUST SHAPERO, shall arrive at the age of twenty-one (21) years, the Trustee shall pay to him the entire net income from the trust estate during the continuance thereof, unless the individual trustee during his lifetime, or the successor individual trustee, as the case may be, shall otherwise direct; Provided, However, that in no event shall the Grantor, either as an individual or Trustee hereunder, be entitled to receive any of the income or the accumulations thereof derived from the trust estate created herein.
The trustees were directed to distribute the trust corpus to the beneficiary in varying amounts, beginning when he or she reached the age of 30 and ending when the beneficiary reached the age of 45, at which time all the rest, residue, and remainder of the trust estate was to be paid over to the beneficiary, free and discharged from the trust. In the event any beneficiary died before becoming entitled to receive the trust corpus, provisions were made in favor of the beneficiary's issue, or, if none, for the petitioner's other children and their issue.
Paragraph 5(e) of the trust provided as follows:
(e) If the trusts hereof shall fall by reason of the deaths of the persons finally entitled to take thereunder, then the trustees shall assign, transfer, convey and pay over all of the then rest, residue and remainder of the trust property and estate to Grantor's heirs-at-law, who shall be determined as of the time of the death of the last surviving beneficiary of the trusts, and who shall take under the laws of the State of Michigan as though Grantor had died intestate.
The trust for the benefit of the petitioner's wife provided that, after paying necessary expenses, the trustees should distribute the entire net income therefrom to the beneficiary at such times and in such amounts as the individual trustee (petitioner) should direct during his lifetime and after his death as the successor individual trustee should direct, and after the death of such successor individual trustee, as the beneficiary should direct, unless and until she should remarry, at which time her power to direct the payment or use of the net income should cease and determine. Any income not disbursed was to be accumulated and retained as cash or invested and distributed at a later date, in the discretion of the individual trustee. In the event the petitioner's wife should remarry after his death, the trustees were directed to set aside one-third of the then corpus of the trust estate in a separate trust for her use and benefit and to hold the remaining two-thirds in equal shares for the benefit of the petitioner's children, to be administered in the same manner as that provided in the trusts for their benefit. Upon the death of the petitioner's wife, the entire corpus of the trust was to be held in equal shares for the benefit of the petitioner's children as aforesaid.
Provision was made in each of the trusts for invasion of the corpus upon direction by the individual trustee or his successor if, in the opinion of the individual trustee or his successor, the income of the trust was insufficient to support and maintain the grantor's wife, and to furnish her with funds for reasonable travel and recreation, or, if it was insufficient to support, maintain, and educate the grantor's children, including a college, university, or finishing school education, or, in case of any emergency befalling any beneficiary, such as illness, accident, or extraordinary financial distress. It was provided, however, that during the lifetime of the grantor no part of such principal should ever be used to satisfy any legal obligation of the grantor toward such beneficiary or to relieve the grantor therefrom.
Material provisions, common to all the trusts, as typified by those in the Ruth Bernstein Shapero trust, are as follows:
1. The Grantor shall have the power at any time during his lifetime, by an instrument in writing delivered to the Trustees, to modify, alter, change or amend this agreement in whole or in part, but not in such manner as to bring about a revocation of this agreement or to change or impair the right of enjoyment of any beneficiary, and provided, further, that Grantor shall not have the power at any time during the continuance of the trusts hereof to revest in himself title to any part of the corpus or income of the trust hereby created.
8. The Trustees are hereby vested with full and complete legal and equitable title to all of the property and estate embraced within the trusts hereof, both as to principal and income therefrom, subject only to the execution of the trusts hereof; and neither the principal nor the income of the trust estate shall be liable for the debts of any beneficiary hereof, nor shall the same be subject to seizure by any creditor of any beneficiary under any writ or proceeding at law or in equity, and no beneficiary hereunder shall have any power to sell, assign, transfer, encumber or in any other manner anticipate or dispose of his or her interest in the trust estate or the income produced thereby.
9. The Trustees shall have full power and authority in respect of all property embraced within all of the trusts hereof, as follows:
(a) Detroit Trust Company, the corporate Trustee, shall have the sole custody of all of the personal property, as well as the custody of the muniments of title to all property comprising each and every trust estate.
(b) To take possession of said trust property and estate and collect and receive the moneys, interests, profits and income arising therefrom, with full power in the Trustees, if in the opinion of the individual Trustee, or the successor individual Trustee as the case may be, it shall seem advisable so to do, to improve, repair and maintain any and all property belonging to each trust estate herein. The trust properties and estates shall be managed by the individual Trustee, or his successor individual Trustee as the case may be, as in his judgment and discretion may seem most advantageous to each trust estate and the beneficiaries thereof. Included in such power of management shall be the power to vote in person or by general proxy, any and all stocks in any and all corporations at any and all meetings of stockholders for any and all purposes, without any limitations whatsoever; and the individual Trustee, or the successor individual Trustee as the case may be, shall have full power to direct the manner in which any and all stocks embraced within the trust estate shall be voted.
(c) The Trustees are expressly authorized to retain in the trust any or all property of said trust in the form in which the same shall be received by the Trustees, whether or not said property may constitute a legal investment for trust funds, and the Trustees are hereby released and discharged from all liability and damage to the trust estate and the beneficiaries thereof which may accrue by reason of retaining in the trust any property in the form in which it shall come into the hands of the Trustees. The Trustees shall also have full power to sell, either for cash or part cash and part deferred payments, convey, exchange, lease for any length of time and with or without covenants of renewal, and to mortgage, pledge, partition, distribute or otherwise dispose of all of said trust property and estate or any part thereof or any interest therein at such time or times and in such manner, either public or private, and upon such terms as in the absolute and uncontrolled discretion of the individual Trustee, or the successor individual Trustee as the case may be, shall deem expedient and proper. Such power and authority to sell, convey, partition, and distribute shall continue as a power in trust for such time, not exceeding six (6) months after the time limited for the termination of said trust, as may be permitted by law.
(d) In the event of any disposition whatever of any property subject to said trust, said Trustees shall make, execute and deliver any and all such instruments in writing as shall be necessary or proper to carry out the same. Purchasers and other persons who shall pay any trust moneys to said Trustees shall be exempt from all responsibility with respect to the application of the same, and from the necessity of inquiring into the regularity, validity or propriety of any disposition made or purported to be made under the trusts or powers contained in this instrument, provided the same upon its face does not appear to be irregular.
(e) The Trustees shall invest and keep invested all funds of the trust estate at any and all times available for investment purposes, in such mortgages, secured notes, common and preferred stocks, bonds, debentures and commodities, foreign or domestic, as the individual Trustee may designate, and/or in such other forms of investments as the individual and/or successor individual Trustee may think best. It is Grantor's intention to give the individual Trustee, and the successor individual Trustee the fullest possible latitude in making investments, and the Grantor hereby releases and discharges the Trustees from any and all liability and damages which may accrue to the trust estate or the beneficiaries thereof on account of any investment made by the Trustees which shall not be legal investments for trust funds.
(f) The Grantor hereby reserves unto the individual Trustee and unto his successor individual Trustee, full, absolute and complete power and authority to direct the sale and to fix the price of any and all property embraced within the trust estate at any time, and also to choose and direct all investments for the trust estate during the continuance of the trust.
(g) To distribute in kind, at a price to be fixed by the individual Trustee, or the successor individual Trustee as the case may be, any stocks, bonds or other securities embraced within the trust estate, in equal or unequal proportions to or among the persons entitled to participate in the distribution thereof. The selection of the securities for distribution, the proportions and the prices thereof, shall rest in the sole and uncontrolled judgment and discretion of the individual Trustee, or the successor individual Trustee as the case may be, and when selected, the portions determined and the prices thereof fixed by said individual or successor individual Trustee, the same shall be final and conclusive, and binding upon all persons concerned therewith.
(h) To become a party to any concerted action among security holders concerning any voting trust agreement, reorganization, recapitalization, financing or refinancing plan which the individual Trustee shall deem for the best interests of the trust, and to that end may deposit with any Committee or Trustee, any stocks, bonds or other securities embraced within any trust hereof and may receive and collect the securities issued as a result thereof, making any subscriptions or payments required therewith, and the Trustees shall not be responsible for any act of such Committee or Trustee, nor be liable for having deposited with or having assigned to such Committee or Trustee any of said stocks, bonds or other securities, so long as the individual Trustee hereof shall have acted in good faith.
(i) To incur, and pay from the trust estate, all reasonable expenses in connection with the management preservation and administration of the trust, and the same may be charged against either income or principal thereof, as the Trustees may elect.
(j) It is Grantor's intention to give the individual Trustee during his lifetime, and after his death to the successor individual Trustee, the fullest and most complete powers and authority which it is possible for Grantor to give in respect of all sales, investments, expenditures, management and control of the trust property and estate; provided, always that no power herein given to the individual Trustee shall ever be interpreted or construed as a power giving the Grantor the right to revest in himself title to any of the trust property and estate or the income produced therefrom.
10. The particular designation or enumeration of any power herein given shall be deemed to be in anywise in limitation of more general language used herein, but such general language shall be deemed to be in addition to and in extension of such particular language.
11. The Trustees shall not be liable for any losses that may come to said trust property, either in principal or income, arising from any investment held by them, whether now made by the Grantor or hereafter made by the Trustees, provided such loss has not occurred through the gross mismanagement or willful default of said Trustees, Good faith shall be all that is required of the Trustees hereunder.
12. Detroit Trust Company shall semi-annually credit the trust account with such amounts as it shall receive on account of interest on cash balances, and if Detroit Trust Company shall retain any cash belonging to the trust estate, it shall likewise semi-annually credit to the account of interest as it shall then be paying on its certificates of deposit.
13. The individual Trustee during his lifetime, and thereafter the successor individual Trustee, notwithstanding anything hereinbefore contained to the contrary, shall have full, complete and absolute power any authority to direct the payment and conveyance, forthwith or otherwise, of any part or all of the principal of the trust property and estate, as well as any accumulated income therefrom, to the then living beneficiary or beneficiaries thereof, in such proportions as the individual Trustee or the successor individual Trustee may think proper.
14. The Grantor hereby reserves the right and power unto himself to at any time and from time to time during his lifetime, remove the corporate Trustee and fill the vacancy thereby created, by appointing another corporate Trustee, or to leave the vacancy thereby created unfilled, in which latter event the duties and powers of the corporate Trustee shall vest in and be exercised by the individual Trustee, and upon the death of the individual Trustee the same shall vest in and be exercised by the successor individual Trustee; and likewise during his lifetime, by a proper instrument in writing, to enlarge the number of individual Trustees and successor individual Trustees, and thereafter to reduce the number of individual Trustees and/or successor individual Trustees.
15. Upon the death of Grantor, Fred J. Kennedy, of Detroit, Michigan, shall automatically be and become the successor individual Trustee and co-Trustee with the corporate Trustee of the trusts herein created, upon his filing with the corporate Trustee his written acceptance of said Trusteeship, with all of the powers and authority hereinbefore given to and conferred upon the individual Trustee.
The original corpus of the Ruth Bernstein Shapero trust consisted of 20,000 shares of the stock of Cunningham. The original corpus of each of the other two trusts consisted of 672 shares of Cunningham stock. In 1937, 10,300 shares of Cunningham stock were sold from the Ruth Bernstein Shapero trust d the proceeds were invested in other stocks and securities. The other 9,700 shares are still held in the trust. The petitioner from time to time contributed additional shares of the stock of Cunningham to the children's trusts, the last such contribution being in 1938. A purchase was also made by the children's trusts of shares of Ray Mar Corporation, the assets of which consisted wholly of Cunningham shares. Throughout the years here in controversy each of the children's trusts held 7,092 shares of Cunningham, as well as other stocks and securities.
During 1940 to 1941 there were 190,798 shares of stock of Cunningham outstanding. In 1940, 104,279 shares were voted and in 1941, 104,660 shares were voted. Of the amounts so voted the percentage of shares voted by the Shapero interests, including the amounts held in the trusts, was 60.64 per cent in 1940 and 59.85 per cent in 1941.
All shares of stock and other registered securities in the trusts were held in the name of ‘Nate S. Shapero & Detroit Trust Company, Trustees u/a, dated December 6, 1934, for the benefit of (name of beneficiary).‘ All securities were held in the physical possession of the corporate trustee. The funds of the trust are carried by the corporate trustee in its general fiduciary account for all trusts administered by it. The shares of Cunningham stock held in the trusts were voted by an officer of the corporate trustee at the stockholders' meetings of Cunningham in each of the years 1936 to 1941, both inclusive, under proxies granted by the trustees. In making sales of securities and in making investments, such transactions have, in most cases, been passed upon by the investment committee of the corporate trustee, as well as by the petitioner as individual trustee. Such transactions were usually originated by some officer or employee of the corporate trustee. No loan of cash or securities has ever been made out of any of the trusts to or for the account of the petitioner, nor has he ever requested such a loan.
Of the net income for 1940 of the trust for the benefit of the petitioner's wife, the sum of $1,767.15 was distributed to her in that year. Of the income for 1941, $1,767.15 was distributed to her in that year. None of the income of the children's trusts has been distributed, but all has been retained and invested.
Returns were filed for the years in question by the petitioner, his wife, and each of the three trusts. The taxes shown to be due thereon were paid. In his individual returns for 1940 and 1941 the petitioner reported net income in the respective amounts of $88,401.76 and $97,865.87.
Net income taxable to the fiduciary was reported as follows by the three trusts:
+----------------------------------------+ ¦ ¦1940 ¦1941 ¦ +------------------+----------+----------¦ ¦Trust for wife ¦$13,031.13¦$14,345.14¦ +------------------+----------+----------¦ ¦Trust for son ¦7,116.28 ¦8,955.00 ¦ +------------------+----------+----------¦ ¦Trust for daughter¦7,140.28 ¦9,011.70 ¦ +----------------------------------------+
In October 1944 consents, signed respectively by the petitioner, as grantor, and by the trustees, were filed with the respondent in conformity with the requirements of section 134(b)(2) of the Revenue Act of 1943.
OPINION.
HILL, Judge:
The question for our determination is whether or not the petitioner is taxable as an individual upon the income of the three trusts created by him in 1934 for the benefit of his wife and minor children. The respondent has determined that the powers over the trusts retained by the petitioner as donor-trustee require the taxation to him of the trust income under section 22(a) of the Internal Revenue Code.
It has often been observed that each case of this character rests primarily on its own facts. The facts here indicate to us that petitioner's economic position was essentially the same after the trusts were created as it was before. We therefore believe that as to each trust this case is within the ambit of Clifford v. Helvering, 309 U.S. 331, and respondent accordingly must be sustained.
The significance of petitioner's gifts in trust can be properly determined only if it is borne in mind that he and the beneficiaries, two of whom were minors, are all and the only members of an intimate family group, he being the head of that group and annually receiving income in excess of his own normal needs. The income in question remains in his family and the immediate question presented is whether the allocation of such income to family members other than himself effected any substantial change in petitioner's rights of enjoyment of the property forming the corpora of the trusts. As has been repeatedly said, the issue will be determined not by whether petitioner retained some particular right over the property, but whether the bundle, or aggregate, of his retained rights plus the indirect benefits from the operation of the trusts constitute ‘a fair equivalent of what he previously had.‘
We think it would be difficult to vest more complete administrative control in a trustee than that which petitioner expressly retained to himself over the corpus of each trust. He held as trustee ‘the fullest possible latitude in making investments,‘ the discretionary right to manage all the trust properties, the unlimited power to vote all trust stocks or to direct the manner in which they should be voted, ‘absolute and uncontrolled discretion‘ to determine the expediency and propriety of selling, mortgaging, or otherwise disposing of all trust property, ‘at such time or times and in such manner, either public or private, and upon such terms‘ as he though fit, the right to distribute in kind trust securities selected by him and to make a ‘final and conclusive‘ determination of the proportions and prices at which such distributions should be made, the privilege of joining with security holders in voting trusts, reorganizations, and refinancing arrangements and of depositing trust stocks for that purpose, the ‘complete and absolute power * * * to direct the payment and conveyance * * * of any part or all of the principal of the trust property * * * , as well as any accumulated income therefrom, to the then living beneficiary or beneficiaries thereof, in such proportions (as petitioner) may think proper,‘ and ‘the fullest and most complete powers and authority which it is possible for Grantor to give in respect of all sales, investments, expenditures, management and control of the trust property and estate; * * * ‘ It is clear that under the trust instruments the intended and vested powers of the corporate trusts were limited to the perfunctory duties of property custodian and bookkeeper. To the extent that Detroit Trust Co. did more than that in the management of the trusts, it acted at the grace of petitioner as individual trustee and was at all time subject to his control. Petitioner's complete control over the trust company was assured by his retention in himself, as grantor, of the power to remove the corporate trustee and to fill or leave open the vacancy thus created. Under these circumstances, the corporate trustee's conduct in the operation of the trust is not indicative of divestiture by petitioner of any control over the trust corpus. Louis Stockstrom et al., Trustees, 4 T.C. 5; affd., 151 Fed. (2d) 353.
It may be said that, however extensive are such enumerated powers over property, they alone, particularly when exercisable as trustee and thus subject to the control of chancery, are not equivalent to property ownership under the Clifford doctrine. We have indeed said that in these cases the possibility of economic benefit to the holder of such powers is indispensable to a determination of the taxability of the income from the property to him under section 22(a). See David L. Loew, 7 T.C. 363, and Alma M. Myer, 6 T.C. 77.
Petitioner's trustee powers far exceeded those traditionally exercisable at chancery, however, and in their exercise petitioner had by exculpatory clauses and by reservations of broad discretion removed himself to the fullest extent possible under the law from the control of the chancellor's conscience and the application of the sanctions of equity. In general, the beneficiaries could require of him as trustee only good faith, a limitation the substance of which must be viewed in the light of ‘the normal consequence of family solidarity. ‘ In addition, petitioner reserved to himself, as grantor, a lifetime power to alter or amend the trust agreements in whole or in part, which might be exercised to avoid threatened interference with his dominance of the trusts by shifting the relevant managerial powers from himself as trustee to himself as grantor. Compare the reserved powers of amendment in Kohnstamm v. Pedrick, 153 Fed.(2d) 506, and in Cory v. Commissioner, 126 Fed.(2d) 689.
Petitioner points out that the power to amend expressly could not be used to revoke the trusts or ‘to change or impair the right of enjoyment of any beneficiary.‘ Furthermore by explicit limitation, petitioner did ‘not have the power at any time during the continuance of the trusts * * * to revest in himself title to any part of the corpus or income * * * .‘ Nor do the trust instruments provide for reversion of corpus or accumulations to the grantor. As indicated many times, however, the ability of the grantor to recover title to principal or income and his ability to dispose of either by will are neither separately nor together prerequisites of the application of the Clifford rule. See Ellis H. Warren, 45 B.T.A. 379; affd., 133 Fed.(2d) 312, and Commissioner v. Buck, 120 Fed.(2d) 775. Where a grantor-trustee's control over corpus or income during the taxable year is substantially equivalent to that of a title holder, lack of title as an individual is of ‘little or no significance in household relationships.‘
As to the benefits derivable by petitioner from the trusted property, we note at once that, by the exercise of his settlor and trustee powers, he remained after the creation of the trusts fully able to enjoy the ‘challenge and zest of employing the (property) to beget more property and * * * to vindicate his business skill * * * .‘ He continued to know and use the ‘pleasure and power regulating, providing for or supplementing the wants and conveniences of the members of his family in their attained station * * * .‘ Cf. Stockstrom v. Commissioner, 148 Fed.(2d) 491, 494,
modifying 3 T.C. 255, and Funsten v. Commissioner, 148 Fed.(2d) 805.
All subsequent references to ‘the Stockstrom‘ decisions are to this case rather than to its companion, which is cited previously in this opinion.
Petitioner contends, however, that these benefits and others flowing from administrative control are not sufficient to invoke the Clifford rule, and he urges that as to each of these trusts his retained control over distribution of corpus and income was usable exclusively for the advantage of the beneficiaries and not for himself. He appears to rely principally on J. M. Leonard, 4 T.C. 1271; Donald S. Black, 5 T.C. 759, and decisions following those cases.
Petitioner retained a broad discretionary power over distribution of corpus by inserting in each trust instrument the provision as follows:
13. The individual Trustee during his lifetime, and thereafter the successor individual Trustee, notwithstanding anything hereinbefore contained to the contrary, shall have full, complete and absolute power and authority to direct the payment and conveyance, forthwith or otherwise, of any part or all of the principal of the trust property and estate, as well as any accumulated income therefrom, to the then living beneficiary or beneficiaries thereof, in such proportions as the individual Trustee or the successor individual Trustee may think proper.
This is in the least a reservation of power to terminate the trust at will, or to distribute any portion of the corpus that petitioner should think desirable. Respondent points out that in deciding adversely to the taxpayer in Lorenz Iversen, 3 T.C. 756, we commented upon such a power as follows:
The plain meaning of these provisions is that the petitioner could have terminated the trusts at any time. It is uncertain whether in case of such termination of the trust in whole or in part of the trustee would have been required to pay over to the beneficiary all or any part of the corpus of the trust which was thus terminated. It is plain, we think, that a power to terminate a trust at will adds materially to the ‘bundle of rights‘ under which a grantor's liability under section 22(a) is imposed.
Referring to the second sentence of the quotation, petitioner argues that the Iversen case is distinguishable because here it is certain that the use of the power to terminate would merely accelerate the enjoyment of the property by the beneficiaries.
We think, however, that the last sentence of the quotation expresses a valid general principle, independent of the applicability of the preceding sentence to the particular situation. Whatever doubt there may have been on the score previously
was surely dispelled by the words of the Supreme Court in Commissioner v. Estate of Holmes, 326 U.S. 480.
See concurring opinion in Iversen, at 3 T.C. 774.
In discussing the estate tax significance of a reserved power to terminate a trust and distribute corpus and accumulations to the then beneficiaries, the Court said:
326 U.S. 480; rehearing denied, 327 U.S. 813, reversing 148 Fed.(2d) 740, which affirmed 3 T.C. 571. But, compare Kohnstamm v. Pedrick, supra, decided prior to the Holmes case.
It seems obvious that one who has the power to terminate contingencies upon which the right of enjoyment is staked, so as to make certain that a beneficiary will have it who may never come into it if the power is not exercised, has power which affects not only the time of enjoyment but also the person or persons who may enjoy the donation. More therefore is involved than mere acceleration of the time of enjoyment. The very right of enjoyment is affected, the difference dependent upon the grantor's power being between present substantial benefit and the mere prospect or possibility, even the probability, that one may have it at some uncertain future time or perhaps not at all. A donor who keeps so strong a hold over the actual and immediate enjoyment of what he puts beyond his own power to retake has not divested himself of * * * control * * *
So commenting, the Supreme Court held that such a discretionary power made the beneficiaries' enjoyment of the transferred property subject to change by the settlor through his exercise of a power‘ to alter, amend or revoke.‘ That decision and the reasoning upon which it was based make it clear to us that this reserved control over the disposition of corpus has importance here in terms of petitioner's economic position after the creation of the trusts. Though he had divested himself of title to the trusteed property, his retained command over it and control over the named and potential beneficiaries. By the grants in trust he confined himself to changing the enjoyment of the property within a limited group, but he remained able to employ the bargaining power which the property engendered. Certainly, there can be no doubt that a retained power to change the enjoyment of trusteed property is one of the bundle of rights of ownership which invokes the Clifford rule. See Commissioner v. Buck, supra, and Stockstrom v. Commissioner, supra.
In taxing to the grantor the income of long term irrevocable trusts we have frequently pointed to retained power to control the disposition of income. In the Stockstrom case, the Circuit Court of Appeals for the Eighth Circuit pointed out that our decision taxing the income to the grantor had been rested upon the combination of control over corpus and the power to dispose of income, and it declined to consider whether either ground singly was such as might create taxability to the settlor. As to the latter power we had said:
It may be that in cases of long term trusts the settlor is to be taxed on the trust income only if in addition to broad administrative powers over the trust corpus there are also powers over the distribution of the income. * * * His powers over the distribution of the trust income were not as complete as in the case of Commissioner v. Buck, 120 Fed.(2d) 775, but were nevertheless substantial. Here, as in Ellis H. Warren, 45 B.T.A. 379; affd., 133 Fed. (2d) 312, ‘he was not required to distribute any part of the income to any of the beneficiaries during his lifetime,‘ and in the trusts created for his children petitioner, as trustee, had the right to pay the income either to his child or his grandchildren. In all of the trusts the immediate payment of any income to any beneficiary was in his sole discretion. While it is true that any trust income not paid out was to be accumulated in the trust, this retention of the power over the purse strings with regard to the members of his immediate family who were beneficiaries would warrant our conclusion that ‘the direct satisfaction of paterfamilias are thus virtually undiminished * * * . ‘ * * * When this power of the settlor-trustee over the distribution of the trust income is combined with extraordinary broad administrative powers over the trust corpus, we can not escape the conclusion that the doctrine of Helvering v. Clifford is applicable and the incomes of the trust are taxable to the settlor.
The grantor in that case was able, by accumulating income, to favor the remainderman over the primary beneficiary, a distribution power perhaps less broad than that in The buck case, where the grantor-trustee could shift income between primary beneficiaries. The significance of these particular powers is in each case the same, i.e., that the petitioner retained ‘a power over the purse strings‘ and thus could still during his lifetime, grant the income to the income beneficiaries or withhold it from them.
It seems obvious that discretionary power of equivalent substance was reserved by petitioner as to the trust for his wife. The trustees were authorized to distribute income to her during petitioner's lifetime only at such times and in such amounts as he should direct. This continued command of income, through lifetime control of the time of distribution, coupled with the above mentioned powers over corpus, brings the trust for the wife within the rule of the Warren and Stockstrom cases.
The income of each child's trust was, during minority, to be accumulated and added to corpus, but (1) the trustees were authorized to make distribution ‘out of such accumulations or the corpus‘ as might be needed by the child for maintenance and education, and (2) petitioner, as individual trustee, could during his lifetime direct the distribution of any accumulated income in any way except to fulfill his legal obligations as parent. After the child reached 21 years of age the income was to be distributed, unless petitioner during his lifetime should otherwise direct. Under these provisions petitioner, as did the grantor in the Stockstrom case, had discretionary control over the immediate payment of any income. As before the creation of the trusts, he held the purse strings and could grant to or withhold from each child. None of the income was beyond his immediate command in this respect and through the exercise of this dominion he could enjoy, virtually undiminished, ‘the direct satisfaction of paterfamilias.‘
The distinction between the extent of petitioner's powers over distribution of income and those of the grantor-trustee in the Stockstrom case is that petitioner, even if he survived each child, might not be able wholly to deprive him as primary beneficiary of any of the income. In Leslie H. Green, 7 T.C. 263, we held that this same distinction did not bring that case within the rule of Alma M. Myer, supra, where, on the authority of J. M. Leonard, supra, and cases cited therein, we denied the taxability of trust income to the settlor-trustee. Moreover, it may be noted that at the time Stockstrom created the trusts for his grandchildren he had a life expectancy of only six years. Thus, as a practical matter, he could accumulate current income and thereby control its disposition to the grandchildren during only a small portion of the life of the trusts. Moreover, the successor trustees might in their ‘absolute discretion‘ determine that the beneficiaries had the requisite need for funds in excess of trust income and accordingly distribute to them what Stockstrom had accumulated.
Petitioner could, as to each trust, cause current income to be withheld each and every year until the beneficiary reached the age of 45, when the trust terminated. Distribution of accumulated income which had ben added to corpus distributions began at the beneficiary's attainment of 30 years of age. When the trusts were created in 1934 petitioner's son was 8 years old and his daughter was 4, and at the end of the calendar year 1941 they were 15 and 11, respectively. Thus, petitioner clearly commanded the income during the taxable years 1940 and 1941, and in amending the trust instruments in 1936 he reserved to himself control over disposition of current trust income to the son for 35 years thereafter and to the daughter for 39 years, that is, for the duration of each trust. The date of petitioner's birth, which is not in the record, might indicate that for practical purposes a power of such duration was equivalent to one for the grantor's lifetime. We do not believe that for practical purposes the slight difference between the control over the income retained by petitioner and that reserved by Stockstrom is in itself of controlling significance.
Looking at both petitioner's control over the distribution of corpus and his discretionary power over the disposition of current income, it is clear that until each beneficiary reached the age of 30 years he was, on the record, as dependent economically upon petitioner for need and pleasure as he had been before the creation of the trusts. The beneficiaries' realization of financial benefit on their trust interest through pledge or transfer was prohibited by spendthrift provisions in each trust instrument. Their unqualified right to acquire anything from the trusts was dependent upon their reaching 30 years of age. Thus, petitioner, by the exercise of his discretionary powers, could not only deprive them of all income as it was earned, but could substantially decrease the likelihood of their receipt of any accumulations or corpus by declining to authorize any distributions. Though he could not of certainty vest the accumulated income or corpus in remaindermen, he retained a power to exact of the primary beneficiaries full compliance with a vital condition to their right to realize anything, i.e., that they live the specified number of years. None of the income or corpus of the children's trusts has in fact been distributed. In the other hand, from the day the trusts were created, petitioner could at choice authorize and direct the immediate distribution of current income and/or accumulations and corpus. The quoted remarks of the Supreme Court in Commissioner v. Estate of Holmes, supra, are as appropriate in connection with the substance of petitioner's control over income as they are with respect to his discretionary power to distribute corpus. Petitioner's retained control over the disposition of the trusteed property and its proceeds, though reserved in terms of time and though exercisable by veto, is of such significance in the family situation as to persuade us that by its retention petitioner made possible his continued enjoyment of substantial economic benefit from the trust assets. As in Edison v. Commissioner, 148 Fed.(2d) 810, he has practically ‘retained and power to regulate the purse-strings for his children in relation to the property the same as before‘ the creation of the trusts. In view of his discretion in connection with the children's rights of enjoyment under the trust instruments as here before us, it is unnecessary to the application of the Clifford doctrine that his retained power of amendment expressly be usable to change those rights.
Whether a settlor-trustee's power to distribute or accumulate income for some specified number of years, coupled with broad powers to manage the corpus, the be sufficient in itself to invoke the Clifford rule, we need not here determine. See Leslie H. Green, supra; M. Friedman, 7 T.C. 54; and Lillian R. Chertoff, 6 T.C. 266, and compare with Hall v. Commissioner, 150 Fed.(2d) 304, reversing 4 T.C. 506; David L. Loew, supra; W. L. Taylor, 6 T.C. 201, and Alma M. Myer, supra. We do think that the retention of such a power may and did here make possible the settlor's continued economic benefit from the income of the property formally dedicated to the trust. As indicated above, petitioner also continued able to derive from the property other benefits which are ‘noteworthy indicia of taxability‘ under the Stockstrom decision. Still others are significant.
In creating the trusts petition retained the power to vote all stock held or later acquired by them. During the taxable years each of the trusts held substantial number of shares of stock of Cunningham and together they owned 23,884 such shares, or 21.75 per cent of those outstanding. These shares were 22.90 per cent of all shares voted in 1940 and 28.82 per cent in 1941, and they, plus others voted by petitioner's interests in those years, were 60.64 per cent and 59.85 per cent, respectively, of the total voted. Thus, it was through the trusts that petitioner had control of more than 50 per cent of the voted stock. Petitioner was the president and a director of the corporation. He received $44,999.92 salary and other compensation in 1940, and $59,999.92 in 1941. Though the wife's trust sold in 1937 over half of its original holding of 20,000 shares of Cunningham stock, it retained 9,700 shares through the taxable years. Each of the children's trusts was created with 672 such shares, and later through contribution or purchases its holdings were increased to 7,092 shares during 1940 and 1941. When we consider these facts in connection with petitioner's trustee investment, sale, and management powers over the trusts' corpora, we can not escape the conclusion that petitioner was able through his retained powers to continue to benefit economically from the transferred property. We think this could be accomplished without subjecting himself to equitable restraints for breach of trust. It appears also that through those powers similar to these were pointed to in taxing the settlor-trustee in Edison v. Commissioner, supra; Miller v. Commissioner, 147 Fed.(2) 189; Williamson v. Commissioner, 132 Fed.(2d) 489; M. Friedman, supra, and cases cited therein.
Petitioner's continued dominion over the corpus of each trust was further assured by the reservation of certain other powers as individual trustee. He could direct that the corpus be distributed to the extent which in his opinion was necessary, in the case of the wife for her support, maintenance, and use for reasonable travel and education, and, in case of the children, for maintenance and education, and, as to any beneficiary, to meet any emergency. He could also direct the sale and fix the price of all trust property. Petitioner urges that the first of these rights was limited by its terms and was not exercisable to satisfy his legal obligations, and that the second was not usable to the detriment of the beneficiaries. Without discussing separately or in detail the significance of those retained powers, it is perhaps sufficient to remark that they added materially to petitioner's retained ‘bundle of rights‘ over the property and, in our opinion, were, like those discussed above, useable by petitioner, with substantial ‘satisfactions of economic worth‘ to himself, within the bounds of activity to which he might be limited under the broad terms of the trust instruments. See M. Friedman, supra, and Ellis H. Warren, supra.
We conclude that, considered together, and ‘in the nexus of previous ownership, family economics, technical deduction and continued control,‘ the rights retained by petitioner and the benefits enjoyable by him were such that there was no substantial change in his economic position as a result of the transfers in trust. In our view, therefore, this case is within the purview of the Clifford doctrine as applied in the Stockstrom case, Anna Morgan, 5 T.C. 1089; M. Friedman, supra; and Leslie H. Green, supra. Our supplemental opinion in Estate of Louis Stockstrom, 7 T.C. 251, is dispositive of petitioner's argument based upon T.D. 5488 and Mimeograph 5968, 1946 I.R.B.No. 2, Jan. 28, 1946. We hold that respondent did not err in determining that petitioner was taxable under section 22(a) of the Internal Revenue Code on the income of the three trusts in 1940 and 1941.
Reviewed by the Court.
Decision will be entered for respondent.
BLACK, J., dissenting: I dissent from the majority opinion as respects the trusts for the settlor's two children. I do not dissent from the majority view that the trust which petitioner established for his wife, Ruth, is controlled by our decision in Louis Stockstrom, 3 T.C. 255, modified by Stockstrom v. Commissioner, 148 Fed.(2d) 491. I think the Stockstrom case went very far in taxing to the settlor of certain long term irrevocable trusts for his grandchildren the income thereof on the ground that such income fell within the Supreme Court's decision in the Clifford case. I recognize, however, that our decision in that case was in all essential respects affirmed by the Eighth Circuit and that, wherever applicable, it should be followed. Therefore, I do not dissent from the majority view as respects the trust for petitioner's wife.
I think the two children's trusts are different, however, and are not controlled by the Stockstrom case. I think they are distinguishable for substantially the same reasons as we held the children's trusts were distinguishable from the Stockstrom case in J. M. Leonard, 4 T.C. 1271. In that case, in holding that the children's trusts were not taxable to the settlors, J. M. Leonard and his wife, who created them, we said:
The respondent places considerable emphasis upon the circumstance that one of the grantors was the sole trustee during the taxable years in question. He argues that this factor brings the instant proceedings within the doctrine of Louis Stockstrom, supra. We think the instant case is distinguishable on its facts from the Stockstrom case. In the Stockstrom case the three trusts which were made for the settlor's three adult children contained powers which enabled the settlor-trustee to shift income beneficiaries somewhat similar to the powers reserved to the grantor in Commissioner v. Buck, supra. There are no such powers granted to the settlor-trustees in the instant case. In the Stockstrom case the seven trusts which were set up for the benefit of Stockstrom's seven grandchildren, while not granting to the settlor-trustee powers which were as extensive as those contained in the trusts for his three adult children, did grant to the settlor-trustee the discretion to either accumulate the income or distribute it to the beneficiary. These trusts were for the lifetime of the beneficiaries. We construed this power as being broad enough to enable the settlor-trustee to completely withhold the income of the trust from the grandchild primary beneficiary throughout his lifetime and thereby give it to the remaindermen. To quote from the opinion itself in the Stockstrom case, the settlor-trustee ‘was not required to distribute any part of the income to any of the beneficiaries during his lifetime.‘ We held that this power over the income, when coupled with the broad administrative powers granted the settlor-trustee over the corpus in these several trusts, caused the income to be taxable to the settlor, Stockstrom. * * *
In the instant proceedings Leonard had no powers to cause the shifting income from one beneficiary to another such as were present in the Stockstrom or Buck cases. * * *
Just so here. The settlor-trustee in these two children's trusts no power to shift income from one primary beneficiary to another. All corpus and accumulated income of each of the trusts for the children were to be paid to the beneficiary when he or she reached the age of 45 years, if they had not been paid sooner, within the discretion of the trustee. The powers in this respect are very similar to those in the Leonard case. An examination of the two cases will show that fact. The Leonard case has been followed by us in Alma M. Myer, 6 T.C. 77, and W. L. Taylor, 6 T.C. 201. See also David L. Loew, 7 T.C. 363. It seems to me that the two children's trusts in the instant case fall within the ambit of the foregoing cases and should be decided as they were decided— for the taxpayer. We have here no mere ‘temporary allocation of income‘ among the intimate members of a family group with the corpus coming back to the settlor after a short term such as was present in Clifford v. Helvering, 309 U.S. 331. Here the settlor had no power to ever in himself any of the income or corpus of the trust or give it to anyone else, except the primary beneficiary. It is true that the settlor conferred upon himself as the individual trustee very broad administrative powers, but these, of course, had to be exercised in a fiduciary capacity and are not within themselves sufficient to require the taxing of the income of the trusts to settlor-petitioner. See Cushman v. Commissioner, 153 Fed.(2d) 510, reversing 4 T.C. 512. The powers which the trustee reserved to himself as either grantor or trustee in the Cushman case were very broad. This will be seen from the following quotation from the court's opinion, wherein it said;
* * * the petitioner reserved to himself as grantor power to control retention or sale of trust property and to direct investment and reinvestment of trust funds, and he invested himself as trustee with the extraordinary power of entering into capital readjustments as well as all the ordinary trustee powers, including that of voting the stock held in the trust. Analytically the powers held in the two capacities, are, because of those different roles, different. The powers held as trustee are, of course, held in a fiduciary relationship and must be exercised only in the best interests of the beneficiaries. The power to vote the stock held in trust may not be exercised by the trustee for his own purposes; and where such conduct is threatened, a court of equity will direct the voting of the stock. See 2 Scott, Trusts, 193.1. * * *
Notwithstanding the very broad powers of administration which the settlor in the Cushman case reserved to himself as either grantor or trustee, the Second Circuit held that the income of the trust was not taxable to him under section 22(a) and reversed the decision of this Court, which had so held in 4 T.C. 512. It seems to me that if the Second Circuit was right in the Cushman case, and I think it as, then the majority opinion in the instant case is wrong as to the two children's trust.
I, therefore, respectfully dissent.