Opinion
Docket No. 4027.
1946-02-7
W. L. TAYLOR, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Homer K. Jones, C.P.A., for the petitioner. Frank M. Thompson, Jr., Esq., for the respondent.
The petitioner, cograntor with his wife of an irrevocable trust for the equal benefit of their children, possessed broad powers of management and the discretion to use the income for their support and education, but, at the date fixed for the expiration of the trust, he was required to distribute the undistributed income and corpus to the children, share and share alike. Held, the income of the trust is not taxable to the petitioner under section 22(a) of the Internal Revenue Code. J. M. Leonard, 4 T.C. 1271, followed. Homer K. Jones, C.P.A., for the petitioner. Frank M. Thompson, Jr., Esq., for the respondent.
The respondent determined a deficiency in income tax for 1941 of $1,302.32. The sole issue is whether the income of the W. L. Taylor trust for 1941, including income derived from property contributed to the trust by his wife, is taxable to the petitioner.
FINDINGS OF FACT.
The petitioner, a resident of Memphis, Tennessee, filed an individual income tax return for the calendar year 1941. The respondent included in the petitioner's income for that year the amount of $1,942.16 on the ground that income reported by the W. L. Taylor trust in that amount for 1941 is taxable to the petitioner as grantor of the trust.
On February 20, 1941, the petitioner and his wife, Audrey L. Taylor, created an irrevocable trust by an instrument reading as follows:
The undersigned, W. L. Taylor and wife, Audrey L. Taylor, do hereby transfer, convey and assign to W. L. Taylor, Trustee, for the beneficiaries hereinafter set forth and subject to the terms and conditions hereof, Eighty Thousand ($80,000) Dollars in cash, of which Forty Thousand ($40,000) Dollars is paid by said W. L. Taylor and Forty Thousand ($40,000) Dollars is paid by said Audrey L. Taylor, wife of W. L. Taylor. The powers conferred, the obligations imposed and the rights created hereby are:
1. Wherever in this instrument the names of Audrey L. Taylor is used it shall refer to the wife of W. L. Taylor, one of the comakers of this trust, and wherever the name of Audrey Lucile Taylor is used it shall refer to the daughter of the said W. L. and Audrey L. Taylor.
2. This trust is irrevocable and under no circumstances shall be the makers thereof, or either of them, apply any portion or receive any portion of the trust fund for their individual uses or for any other purposes except as herein set forth.
3. The trust estate may be increased by any person at any time.
4. The said Trustee, is authorized to invest said funds, or any accumulations or additions thereto, in any manner he may see fit without getting the authority or approval of any court and if acting in good faith his judgment shall be final and relieve him from all liability and responsibility whatsoever. In the conduct, management and control of said trust estate, the Trustee shall have precisely the same power as though he were the absolute and unconditional owner of the property, and without in any way limiting this generalization, he may:
(a) Buy any property, real, personal or mixed, on any terms or conditions whatsoever.
(b) Sell any property, real, personal or mixed, that is now or shall hereafter become a part of the within trust estate, on any terms or conditions whatsoever.
(c) Lend any money or property, real, personal or mixed, that now is or shall become a part of the within trust estate on any terms or conditions whatsoever and with or without security for such lending.
(d) Exchange any property, real, personal, or mixed, that now is or shall become a part of the within trust estate on any terms or conditions whatsoever.
(e) Borrow money under any terms or conditions whatsoever with or without pledging, mortgaging, or encumbering any or all of the property, real, personal or mixed, that now is or shall become a part of the within trust estate.
(f) Lease any or all of the property, real, personal or mixed that now is or shall become a part of the within trust estate, under any terms of rental or for any duration of time whatsoever.
(g) If any default occurs in the payment of either principal or interest of any security of the trust estate, or any other situation arises requiring a foreclosure or a suit of any kind or nature, the Trustee shall exercise his bona fide judgment as to the proper proceedings necessary to enforce such claim or suit, or whether any proceedings shall be taken at all, and shall have the full right to make any compromise, renewal or similar agreement as he may deem best and when the Trustee shall exercise his bona fide judgment in the premises his action not to be open to review by legal authority, court or body.
(h) The Trustee may sell or exercise any subscription warrants and may sell or retain any stock dividends, the same to be held either as principal or interest as may be proper in the judgment of the Trustee, his decision on this point to be final.
(i) The Trustee is authorized and empowered to encroach on the corpus of the trust estate of any beneficiary hereunder in case of serious illness or other misfortune of such beneficiary, and is further authorized and empowered to encroach on the corpus of the trust estate of any beneficiary for his or her education, the absolute discretion of the Trustee in this regard to be controlling.
5. In no event shall any purchaser from the Trustee or any other person or corporation dealing with the Trustee, in respect to any property held by him hereunder, be required to ascertain the authority and power of the Trustee to make any sale of such property or any transfer, assignment or delivery thereof to such purchaser; but such purchaser and all other parties shall be entitled to rely upon the delivery, transfer, assignment or other disposition of any such property by the Trustee as having been in all respects fully authorized, and shall not be affected by any notice to the contrary or be required to see to the application of the purchase money.
6. For the purpose of making distribution of the trust property, the trustee is authorized and empowered to value and appraise any or all of the said trust property and to distribute the same in kind or in cash, or partly in kind or partly in cash in his sole discretion, and the determination of the Trustee as to the fairness and equality of such distribution shall be binding and controlling on all persons entitled to receive any share of the trust estate.
7. The Trustee is authorized and empowered to incur any expenses necessary in his discretion to carry out the terms of the trust, and such expenses, as well as all taxes of every kind and description payable by law out of the trust estate shall be paid out of the trust estate, and such payments shall be charged pro rata to the shares of the trust estate.
8. This trust shall continue until June 20, 1964, and if any children other than Audrey Lucile are born to the said W. L. and Audrey L. Taylor and are then living, the trust shall continue as to the share of such after born child or children until each such child reaches the age of twenty-five years; when the trust ceases, the funds on hand shall be turned over absolutely to Audrey Lucile Taylor and any other children of said W. L. and Audrey L. Taylor, share and share alike, their heirs and next of kin, the children of any deceased child taking its parent's share.
The net income from the trust estate (or so much thereof as in the judgment of the Trustee may be necessary or suitable for the education, maintenance, support or pleasure of the beneficiaries of this trust, considering their station in life and manner of living) the Trustee shall pay, in such manner as he may desire, to Audrey Lucile Taylor and any other children of the said W. L. and Audrey L. Taylor equally, the payments continuing to the issue of any deceased child, such issue getting the parent's share, and to the survivor or survivors in case any child dies without issue. At all times the Trustee may make payments to the parents or either parent of any minor child until such time as in the absolute judgment of the Trustee such child is old enough to receive the funds personally, and if both parents die before such time, the payments for such period or periods to be made to a legally authorized and empowered guardian for said beneficiaries. Likewise at all times any portion of the net income not needed by the beneficiaries as hereinabove provided in this paragraph, in the absolute discretion of the Trustee, may either be held by the Trustee for future payments or added to the corpus of the trust estate.
9. Upon the death of, resignation or refusal to act of the said W. L. Taylor at any time during the life of this trust, Audrey L. Taylor, if living and if she cares to act, shall be the succeeding Trustee, but if she be dead at that time or if she refused or is unable to act, then any Trust Company or any bank possessing trust powers, the institution selected having a capital and surplus of not less than $2,000,000.00, shall be selected as such succeeding Trustee by the said Audrey L. Taylor, if living, or if she be dead by the beneficiaries of the trust, if adults, or by some guardian duly appointed and acting for them, if minors. Any succeeding Trustee or Trustees shall be clothed with all of the powers, rights, duties and obligations herein conferred upon the original trustee.
10. The bond of the Trustee is expressly waived, except that the beneficiaries, if adults, or some legally constituted guardian acting for them, if minors, may at any time require a surety bond of the Trustee, the expense of the same to be borne by the trust estate.
11. No Corporate Trustee hereunder shall at any time invest the funds of the trust in any stocks, bonds, securities, or properties of any kind in which it shall be interested directly or indirectly and any such investments, if made, may be immediately rescinded and cancelled and the invested funds at once restored to the trust.
12. The interest of any beneficiary herein shall not be subject to assignment and such beneficiaries are restrained from selling, assigning, hypothecating, transferring or otherwise disposing of the corpus of the trusts or the income thereof before it comes into his or her hands, nor shall such corpus or income by subject to execution or other legal process for any debt or liability and beneficiary may have contracted or may hereafter contract or be liable for any time, and such beneficiary shall have no right of anticipation, and shall have neither property nor rights of property in said income, or any part thereof, or the corpus of said estate which could at any time be subjected to execution or other legal process, or be available to any creditor now or hereafter existing, directly or indirectly, or in any manner or form whatsoever, but all payments of income or principal hereunder shall be made solely to such beneficiary personally, and to no other person or persons.
13. In the event a Corporate Trustee comes to act, the beneficiaries, if adults, or a duly qualified guardian acting for them if minors, shall have the right at any time to change the corporate trustee upon giving thirty days written notice, and the new trustee so appointed or selected shall likewise be clothed with all the powers herein conferred, subject to the limitations herein made as to said corporate trustee.
14. The compensation allowed the Trustee shall in no event exceed the usual compensation allowed trust companies for similar duties, and upon the final distribution shall not exceed one-half of one percent of the corpus of the estate.
15. This Agreement or Declaration of Trust shall be construed according to the laws of the State of Tennessee, where it is made and where it is to be enforced. * * *
When the trust was created, the petitioner owned property worth about a million dollars, and his wife had a separate estate of approximately the same amount. They each contributed $40,000 to the trust from their own funds. At the date of the hearing the corpus of the trust amounted to about $115,000, of which from $5,000 to $10,000 was contributed by the petitioner's father and from $25,000 to $30,000 was contributed by the petitioner at various times subsequent to February 20, 1941. The petitioner and his wife, in addition to their daughter, Audrey Lucile Taylor, named as a beneficiary of the trust, have another child who was born after the execution of the trust instrument.
The petitioner has at all times performed the duties of trustee and made all investments of trust funds. The property owned by the trust at the date of the hearing consisted of 200 to 250 acres of land in Germantown, Tennessee, $10,000 of United States Bonds, $12,000 of bonds of the T. A. Gibson Cotton Co., 1,000 shares of the common stock of the Federal Compress & Warehouse Co., and certain notes of an individual. The petitioner is chairman of the board of directors of the Federal Compress & Warehouse Co., but has no connection with the T. A. Gibson Cotton Co. The Federal Compress & Warehouse Co. has 500,000 shares of issued and outstanding common stock. Some shares of such stock were sold in June 1944 at $24.50 per share.
The petitioner has never used any part of the income of the trust or any part of the corpus for his own benefit, and no part of such income or corpus has ever been used for the maintenance, education, or support of the beneficiaries of the trust.
OPINION.
TYSON, Judge:
The respondent has taxed the entire income of the Taylor trust for 1941 to the petitioner, and contends, stressing the provisions of paragraphs 4 and 8 of the trust instrument, that it is so taxable under section 22(a) of the Internal Revenue Code. He cites in support of this contention the cases of Louis Stockstrom, 3 T.C. 255; affd., 148 Fed.(2d) 491; certiorari denied, 326 U.S. 719; and Funsten v. Commissioner, 148 Fed.(2d) 805.
Since we think that decision here is controlled by J. M. Leonard, 4 T.C. 1271, it would be fruitless to discuss the numerous cases involving a question such as we have here which have been decided by the courts since the decision by the United States Supreme Court in Helvering v. Clifford, 309 U.S. 331, applying section 22(a) of the Internal Revenue Code.
The powers of management given the grantor-trustee under the trust instrument here are, in substance, the same as those given the grantor-trustee in each of three trusts (the only ones necessary to be considered here) in the Leonard case; each of such trusts being created for the benefit of a daughter of the grantors, Leonard and his wife, and each trust instrument containing the same terms and conditions.
As to the powers of the grantor-trustee over the income of each of the trusts in the Leonard case, the trust instrument shows that so much of the income and principal as, in the discretion of the trustee, was deemed proper could be used at any time, and from time to time, for the maintenance, upkeep, education, travel, and general welfare of the beneficiary until she was 21 years of age, but only if the grantors were unable to support her from other sources. As each beneficiary attained the age of 30 years the entire trust estate could be delivered to her and the trust terminated, and if not terminated then, termination was mandatory upon the beneficiary's reaching the age of 50, when the entire trust estate should be delivered to her; and in any event, the trusts were to terminate 20 years and 10 months after the death of the last to die of the 3 daughters living when the trusts were created. Upon the death of any original beneficiary before the termination of her trust, the trust property was to go to persons other than the grantors. The grantors retained no power to alter, amend, or revoke, and they reserved no power to direct that the income or principal be paid to beneficiaries other than those named in the trusts.
Under paragraph 8 of the trust instrument here involved, the petitioner as trustee had the discretion to pay the net income to Audrey Lucile Taylor and any other after-born children equally, or to pay only so much thereof as in his judgment was necessary for their maintenance, education, support, or pleasure; and to accumulate for future payments or add to the corpus any portion of the net income not needed, in his judgment, for the maintenance, education, support, or pleasure of the beneficiaries. Also, under paragraph 8 of the trust instrument, the accumulated income, if any, and the corpus were payable absolutely, share and share alike, to the beneficiaries at the termination of the trust— that is, on June 20, 1964, with respect to the share of Audrey Lucile Taylor, and when the age of 25 years was attained with respect to the other beneficiaries. These provisions of the Taylor trust instrument governing the distribution of the income and the corpus of the trust estate, like the provisions governing the management of the trust property, referred to above, are similar to those contained in the trust instrument considered by us in the Leonard case, and here, as there, the grantors retained no power to alter, amend, or revoke, and they reserved no power to direct that the income or principal be paid to beneficiaries other than those named in the trust. Under the authority of the Leonard case, we hold that the petitioner is not taxable with the income here involved under section 22(a). See also Alice Ogden Smith, 4 T.C. 573; Alex McCutchin, 4 T.C. 1242; and Alma M. Myer, 6 T.C. 77.
The instant case is distinguished from the Stockstrom and Funsten cases cited by respondent as the Stockstrom case was distinguished in the Leonard case; i.e., ‘In the instant proceedings * * * (the trustee) had no powers to cause the shifting of income from one beneficiary to another such as were present in the Stockstrom or Buck cases.‘
The respondent in his brief states that under the provision of the trust instrument authorizing use of the net income for the education, maintenance, and support of the beneficiaries the petitioner could use the entire income of the trust for that purpose and thereby relieve himself of his legal obligation to support his children, and that therefore the entire net income of the trust for the taxable year is taxable to him under Helvering v. Stuart, 317 U.S. 154.
By paragraph 8 of the trust instrument, the petitioner, as trustee, had the power to use so much of the net income as he deemed necessary for the education, maintenance, or support of his minor children, the beneficiaries of the trust, and, under the law of Tennessee, he had an obligation for their support. W. C. Cartinhour, 3 T.C. 482, and cases cited therein. The case, therefore, is one which would fall within the principle of Helvering v. Stuart, supra, except for section 134 of the Revenue Act of 1943. Section 134 amended section 167 of the Internal Revenue Code by adding subsection (c), which provides that the income of a trust shall not be considered taxable to the grantor under subsection (a) or any other provision of Chapter I merely because such income, in the discretion of another person, the trustee, or the grantor acting as trustee, may be applied or distributed for the support or maintenance of a beneficiary whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. The amendment, by section 134(b), was made applicable generally to taxable years beginning after December 31, 1942, and, in addition, it was made applicable conditionally with respect to all taxable years, to which the general provision did not apply, in the same manner as if such amendments had been a part of the revenue laws applicable to such taxable years— the condition being that there be filed with the Commissioner (in accordance with regulations prescribed by him with the approval of the Secretary) at such time and by such persons as may be prescribed under such regulations, signed consents that there shall be paid, at such time as the Commissioner may prescribe, all of the taxes under Chapter I of the Internal Revenue Code or under the corresponding provisions of prior revenue laws which would have been paid for the taxable years concerned if such amendments had been a part of the revenue laws applicable to such taxable years.
We have found as a fact that no part of the income of the Taylor trust for the year 1941— the first year in which the trust was in existence— has been used for the maintenance, education, or support of the two Taylor children, the present beneficiaries of the trust. None of the income of the trust, therefore, would be taxable to the petitioner in the event of compliance with the conditions prescribed by section 134(b). We assume that the parties will take such action, if any, as may be necessary, to give effect to the provisions of section 167(c). See W. C. Cartinhour, supra.
Reviewed by the Court.
Decision will be entered under Rule 50.
TURNER, J., dissenting: In my view an intention to retain the right to control and use according to his own dictates the property purportedly placed in trust could hardly have been more plainly stated than was stated by the grantor in the trust instrument herein. The property was his to begin with and the import of property ownership is that the owner may do with it as he pleases. He can keep it, use it, sell it, give it away, or otherwise dispose of it, and, if he does dispose of it or divest himself of his control over and his rights in and to the property, he frees himself of the obligation to pay tax on the income therefrom. In this instance, however, the petitioner for his own reasons saw fit to retain unbridled control over the use and disposition of the property, and the doctrine of Helvering v. Clifford considered, he does not, in my opinion, have any sound basis for claiming that he should not bear the income tax burden on the income therefrom. Further, he may not, in my opinion, find haven behind the claim that the powers in question are trustee powers and not personal. He, the owner, fixed the terms and conditions of the grant and he specifically provided that his control was to continue without any limitation whatsoever. This fact is further emphasized by the fact that in other provisions, paragraph 4(g) for instance, where he intended to limit the scope of his powers, he provided that he should act in good faith. It is accordingly my view that the petitioner's rights in and to the property in question were such as to make the income therefrom his income within the meaning of section 22(a), as interpreted and applied in the Clifford case.
ARNOLD, J., agrees with this dissent.
KERN, J., dissenting: I respectfully dissent from the conclusion of the majority because I am unable to distinguish this case in principle from Louis Stockstrom, 3 T.C. 255; affd., 148 Fed.(2d) 491; certiorari denied, 326 U.S. 719. In that case we held that the income of certain trusts was taxable to the settlor-trustee who held ‘extraordinarily broad administrative powers over the trust corpus‘ plus the power to pay immediately to the beneficiaries the trust income or to accumulate the income during their lives, in his absolute discretion.
In the instant case the administrative powers of the settlor-trustee were even more ‘extraordinarily broad‘ than those held by the settlor-trustee in the Stockstrom case. The settlor-trustee here also has the power in his absolute discretion to either pay immediately the trust income to or for the use of the beneficiaries, or to accumulate it. The trusts, and, consequently, this latter power, cease when the beneficiaries respectively attain the age of 25, and in this respect the instant case differs from the Stockstrom case. However, in my opinion this difference is immaterial. In this case, as in that case, I would conclude that when the ‘power of the settlor-trustee over the distribution of the trust income is combined with extraordinarily 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.‘