Opinion
Docket No. 4658.
1946-03-25
I. A. WYANT, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Allin H. Pierce, Esq., for the petitioner. William F. Robinson, Esq., for the respondent.
Taxpayer in 1934 and 1935 created 8 trusts for the benefit of his 8 children, of whom 7 were minors. In each case a banking corporation was named as trustee. The trusts for the minor children were declared to be for the education, care, and maintenance of the beneficiaries. Income was to be accumulated during the minority of the beneficiaries unless otherwise directed by the taxpayer or his wife. The trustee was authorized to make ‘emergency‘ payments out of principal for the education, support, care, maintenance, and general welfare of the beneficiaries. Petitioner retained the right to alter or amend the manner of distribution to the beneficiaries, except that the term of the trust could not be extended nor the beneficiary be deprived of the principal thereof. Held:
(1) Petitioner is taxable under section 22(a) upon the income of the trusts for the minor children.
(2) The powers retained by the petitioner over the trust for the benefit of his adult son were not sufficient to warrant taxing to him the income therefrom under section 22(a). Allin H. Pierce, Esq., for the petitioner. William F. Robinson, Esq., for the respondent.
The respondent determined deficiencies in income tax against I. A. Wyant for the years 1940 and 1941 in the respective amounts of $2,119.86 and $6,411.97.
The sole issue is whether the respondent erred in determining that the petitioner, as grantor, is taxable under section 22(a) of the Internal Revenue Code upon the income of eight inter vivos trusts created for the benefit of his eight children.
FINDINGS OF FACT.
The petitioner is an individual residing in North Muskegon, Michigan. His returns for the years in controversy were filed with the collector of internal revenue for the district of Michigan.
The petitioner is the father of eight children, the names and dates of birth of whom are as follows:
+-----------------------------------------------------------------------+ ¦Name and date of birth ¦Name and date of birth ¦ +-----------------------------------+-----------------------------------¦ ¦Michael J. Wyant, Dec. 30, 1913 ¦Jane Catherine Wyant, Oct. 26, 1927¦ +-----------------------------------+-----------------------------------¦ ¦Mary Josephine Wyant, Aug. 10, 1922¦Gregory Wyant, Feb. 25, 1929 ¦ +-----------------------------------+-----------------------------------¦ ¦Emma Jean Wyant, July 7, 1923 ¦Bruce Jerome Wyant, Aug. 15, 1930 ¦ +-----------------------------------+-----------------------------------¦ ¦Ira A. Wyant, Jr., Oct. 8, 1926 ¦Suzanne Wyant, Oct. 31, 1934 ¦ +-----------------------------------------------------------------------+
With the exception of Michael J. Wyant, all of the petitioner's children were minors when the trusts hereinafter described were created, and also during the taxable years here involved.
On December 31, 1934, the petitioner created six trusts by separate instruments for the benefit of his children, Bruce Jerome Wyant, Mary Josephine Wyant, Jane Catherine Wyant, Gregory Wyant, Emma Jean Wyant, and Ira A. Wyant, Jr. The corpus of each trust consisted of 1,000 shares of the capital stock of Campbell, Wyant & Cannon Foundry Co.
On December 1, 1935, the petitioner created two additional trusts, also by separate instruments, naming as beneficiaries his two remaining children, Michael J. Wyant and Suzanne Wyant. The corpus of each of these trusts consisted of 800 shares and 1,000 shares, respectively, of the capital stock of Campbell, Wyant & Cannon Foundry Co.
The Hackley Union National Bank of Muskegon, Michigan, was named as trustee of all eight trusts.
The trusts for the minor children were identical, except for the names of the beneficiaries. The trustee was granted broad powers, including the power to care for, manage, control, and dispose of the property; to take and hold legal title thereto, ‘granting to said Trustee the same powers and authority that the Donor has heretofore possessed with reference to said property‘; to vote, in person or by proxy, upon all corporate stocks held by it; to unite with owners of similar property in carrying out any plan for the reorganization of any corporation or company whose securities at any time form a part of the trust and to exchange, upon such terms as the trustee should deem proper, the securities or stocks of any such corporation for other securities or stocks issued by it or by any other corporation; to assent to the consolidation, merger, or liquidation of any corporation whose stocks and securities are held as part of the trust estate, and to exchange the stocks and securities so held for the stocks or securities issued in connection with such merger, consolidation, or liquidation; to exercise generally, in respect to all stocks, securities or other properties held by the trustee, all such rights and powers as are, or lawfully may be, exercised by persons owning similar property in their own right.
The trustee was also empowered to collect the proceeds of the stocks, securities, or other properties included in the trust; to borrow money for the protection of the trust estate or the interest of the beneficiary therein; to issue its note or other evidence of indebtedness therefor; and to assign, pledge, hypothecate, or mortgage any of the trust properties in order to secure repayment of any sum borrowed; to institute suits or legal proceedings to enforce any right with respect to any matter or thing embraced within the terms of the trust; and to pay all taxes and assessments upon the trust estate.
Other material powers of the trustee were as follows:
(c) To Invest. To invest and reinvest in interest-bearing or income-producing notes, bonds, mortgages, corporate stocks or other securities or personal properties the moneys belonging to the principal of the trust estate hereby created, including such sums of money, if any, as the Donor may from time to time deposit with the Trustee to be embraced in this trust, as well as the proceeds of the collection of notes, bonds and securities when the same are paid or sold. In the investment and reinvestment of trust funds the Trustee shall not be confined to those securities or properties specified by any statute or common law rule now in force or hereafter enacted or promulgated in the State of Michigan. The Trustee shall, however, have power and authority to invest the moneys belonging to the trust hereby created in such income-producing notes, bonds, securities, corporate stocks or other property as the said Trustee shall in its discretion deem to be for the best interests of the trust estate or the beneficiary thereof; provided, however, that during the Donor's lifetime the Trustee shall consult with him relative to any intended sale or purchase of securities or properties as an investment of trust moneys hereunder and secure his written approval therefor, unless it is impracticable so to do, and following the death of the Donor sales or purchases as hereinabove defined shall be made only with the written assent of the then Trust Committee supervising investments of the Trust Department, of the then Trust Committee supervising investments of the Trust Department, and such investments shall be in listed securities only of any acknowledged stock and such investments shall be in listed securities only of any acknowledged stock exchange and of investment rating and quality approved by said Trust Committee; and provided further, that the Donor reserves the right during his lifetime to direct the sales or purchases of securities or properties at any time comprising a part or portion of the trust estate.
(d) To Sell. To sell, substitute, exchange or otherwise dispose of all or any part of the notes, bonds, mortgages, corporate stocks, or other properties now or hereafter embraced in this trust, at such times and for such prices and upon such terms as the Trustee may deem to be for the best interests of the trust hereby created, or to carry out the terms and conditions of this instrument; provided, however, that during the lifetime of the Donor the Trustee shall, whenever practicable, consult with him relative to any intended sale of any of the property or properties included in the trust estate, and after the death of the Donor, the Trustee shall, whenever practicable, consult with the said Donor's wife, Emma Wyant, if living, otherwise with the Beneficiary, relative to any sale of any of the trust properties. In case real property shall be or in any manner become a part of the trust estate, the Trustee is hereby instructed to sell and convert the same into personal property (as soon as reasonable prices can be obtained therefor), and all of the properties comprising the trust estate hereby created shall be personal property.
The trustee was required to keep accounts and to render semiannual statements to the petitioner during his lifetime and, after his death, to the beneficiary entitled to the net income of the trust.
Each trust provided that the net income should be remitted to the beneficiary monthly, except that it should be accumulated during the minority only of the beneficiary ‘unless otherwise directed by the Donor or the Donor's wife during their respective lifetimes and following their decease in the sole discretion of the Trustee. The trust hereby created is for the education, care and maintenance of the said (beneficiary) and the Trustee in the exercise of its discretion shall be so guided by this purpose for which the Donor has so created this trust; provided further, that as and when the said (beneficiary) attains (his or her) majority, the net income of the trust estate shall be paid to (him or her) monthly, as above provided.‘
The trustee was authorized to make payments from principal ‘to meet such emergency or emergencies, from time to time as they may arise, for the education, support, care, maintenance and general welfare of the said beneficiary, and for said purpose to advance sum or sums of the principal of the trust estate as may be necessary and advisable for the purposes above described.‘
The principal of each trust was to be distributed as follows: One-fourth when the beneficiary reached the age of 25; one-third of the balance of the principal when the beneficiary reached 30; one-half of the balance when the beneficiary reached 35; and the balance of the principal when the beneficiary reached the age of 40, at which time the trust should terminate. In the event the beneficiary died before reaching the age of 40, the trustee was to distribute the principal to the beneficiary's testamentary appointees and, in default of such appointment, to such person or persons as should be entitled to his or her personal estate under the laws of intestate succession of the State of Michigan.
The petitioner reserved the right to increase the trust estate by adding thereto moneys, notes, bonds, mortgages, or other securities and properties, as to him might seem best.
Provision was made for removal of the trustee from office for malfeasance, misfeasance, or nonfeasance in the performance of its duties by appropriate proceedings in the Circuit Court of the County of Muskegon, Michigan, in Chancery, or any other court having jurisdiction to hear such matters. In the event of such removal its successor was to be appointed by the petitioner during his lifetime and, after his death, by his wife, if living, otherwise, by the beneficiary of the trust.
The trusts were declared to be irrevocable, except that the petitioner reserved the right to alter or amend the manner of distribution to the beneficiary, provided that the trust should not be extended beyond the time provided for termination thereof and that the beneficiary should not be deprived of the principal of the trust estate.
The trust for the benefit of Michael J. Wyant was, in most respects, identical with those of the minor children. It provided, however, that the net income of the trust should be paid to the beneficiary rather than be accumulated. It provided, further, that the trust should continue until the death of Michael J. Wyant, at which time the principal should be distributed to his testamentary appointees, or, in default thereof, to those persons entitled to receive it under the laws of intestate succession of the State of Michigan. It was likewise declared to be irrevocable, except that the petitioner reserved the right to alter or amend the manner of distribution to the beneficiary, provided that the trust should not be extended beyond the lifetime of the beneficiary and that the beneficiary should not ‘be deprived of the ultimate disposal of the principal of the trust estate.‘
On November 2, 1941, the petitioner executed an amendment to each of the trusts whereby he irrevocably renounced, on behalf of himself and his estate, any possible right, title, or interest which either he or his estate might otherwise acquire by inheritance or bequest from the named beneficiary. He also amended the provision in each trust relating to irrevocability to read as follows:
IRREVOCABILITY: The trust hereby created is declared to be irrevocable and shall not be set aside during the period as herein stipulated for its duration. The power to alter or amend the manner of distribution has never been exercised and is hereby waived.
The provision in each of the trusts whereby the petitioner reserved the right to direct the trustee in its sales or purchases of securities was inserted at the suggestion and insistence of the trustee. The trustee believed that the inclusion of such a provision would tend to protect it from possible criticism by bank examiners and others for keeping the trust funds invested in common stocks.
The original corpus of each trust, consisting of shares of the capital stock of Campbell, Wyant & Cannon Foundry Co., was sold and disposed of by the trustee on or before February 18, 1936, in accordance with the petitioner's directions. Common stocks listed on the New York Stock Exchange were purchased with the proceeds.
The stocks so purchased were acquired at the direction of the petitioner. The petitioner has always directed the purchase and sale of all stocks held in the several trusts and the trustee has always complied with his requests.
The voting privileges of the stock held for the several trusts were exercised only by the trustee, which was given this power exclusively by the trust instruments.
The petitioner is the treasurer of the Campbell, Wyant & Cannon Foundry Co. and has held that office during the existence of the trusts. At the time of the hearing he held an additional office due to the death of Campbell, one of the corporation's officers.
Fiduciary income tax returns for the years here involved were filed by the trustee on behalf of each of the trusts, showing net income received and amounts distributed to the respective beneficiaries, as follows:
+-------------------------------------------------------------------+ ¦ ¦1940 ¦1941 ¦ +---------------------+----------------------+----------------------¦ ¦Trust for benefit of-¦Net income¦Amount ¦Net income¦Amount ¦ +---------------------+----------+-----------+----------+-----------¦ ¦ ¦ ¦distributed¦ ¦distributed¦ +---------------------+----------+-----------+----------+-----------¦ ¦Michael J. Wyant ¦$571.52 ¦$896.57 ¦$696.69 ¦$1,238.12 ¦ +---------------------+----------+-----------+----------+-----------¦ ¦Mary Josephine Wyant ¦294.11 ¦None ¦981.84 ¦595.00 ¦ +---------------------+----------+-----------+----------+-----------¦ ¦Emma Jean Wyant ¦294.11 ¦470.00 ¦939.67 ¦485.73 ¦ +---------------------+----------+-----------+----------+-----------¦ ¦Ira A. Wyant, Jr ¦382.95 ¦349.00 ¦847.91 ¦600.24 ¦ +---------------------+----------+-----------+----------+-----------¦ ¦Jane Catherine Wyant ¦382.95 ¦432.04 ¦840.20 ¦690.25 ¦ +---------------------+----------+-----------+----------+-----------¦ ¦Gregory Wyant ¦391.27 ¦None ¦869.86 ¦None ¦ +---------------------+----------+-----------+----------+-----------¦ ¦Bruce Jerome Wyant ¦403.11 ¦None ¦878.19 ¦50.00 ¦ +---------------------+----------+-----------+----------+-----------¦ ¦Suzanne Wyant ¦532.32 ¦None ¦1,053.28 ¦None ¦ +-------------------------------------------------------------------+
Income taxes were paid upon the amount remaining after deducting the ‘amounts distributed‘ from the ‘net income.‘
The amounts so distributed to the beneficiaries, other than Michael J. Wyant, were expended for medical expenses, educational expenses, and travel incident to education, upon the direction of the petitioner's wife. The amounts distributed to Michael J. Wyant were used by him in purchasing a home.
The petitioner filed individual income tax returns for the years 1940 and 1941, reporting thereon net income of $68,901.13 and $78,992.07, respectively.
The respondent determined that the petitioner was taxable upon the net income of each of the trusts created by him and asserted the above mentioned deficiencies.
OPINION.
VAN FOSSAN, Judge:
The issue raised by the pleadings, and as stated by the parties at the hearing, is confined to the question of whether or not the petitioner is taxable, under section 22(a) of the Internal Revenue Code and the rule of Helvering v. Clifford, 309 U.S. 331, upon the income of the trusts created by him in 1934 and 1935.
The respondent has determined, and here contends, that the petitioner never parted with the economic control of the corpora of the several trusts; that he remained in substance the owner thereof; and that the income arising therefrom is consequently taxable to him.
The answer to the question involved requires an analysis of the terms of the trusts and a consideration of all the circumstances attendant on their creation and operation. Helvering v. Clifford, supra. If the powers retained by the grantor over the trust are so substantial that he remains in effect the owner thereof, the trust income is taxable to him as his own.
In so far as the stated question relates to the trusts for the minor children, we think it must be answered affirmatively. That the primary purpose of each of these trusts was to discharge the legal obligations of the petitioner can not well be doubted. The trusts were declared to be for the education, care, and maintenance of the respective beneficiaries. In order to carry out this purpose the petitioner retained complete control over the accumulation and distribution of the trust income. The trust instruments provided that the income should be accumulated during the minority of the beneficiaries, unless otherwise directed by the petitioner or his wife during their respective lifetimes and, after their deaths, in the sole discretion of the trustee. The trustee, however, had no discretion during the life of the petitioner or his wife, but was bound to distribute the income whenever so directed by either of them. The petitioner, therefore, had plenary power over the trust income during the minority of his children and could have it distributed for any purpose whatsoever or accumulated at will. Such sums as were distributed at his direction or that of his wife, who had no adverse interest, were, in accordance with the declared purpose of each trust, to be used to discharge the petitioner's legal obligations toward his children.
In this respect the instant case is closely similar to Whitely v. Commissioner, 120 Fed.(2d) 782. There, as here, the donor created separate trusts for his minor children, naming a banking corporation as trustee. Each trust provided that the trustee should pay the income to the donor if and when so ordered by him during the minority of the child, to be used solely for the support, maintenance, education, and enjoyment of the child. If not called for, the income was to be reinvested. During the taxable year there involved none of the trust income was used for the maintenance of the beneficiaries. It was held, however, that the donor was taxable upon the income of the trusts under section 22(a), the court saying that he could have received the trust income and applied it to the support of his minor children; that he did not do so, but left it to accumulate for them; and that he ‘controlled the use of the money and had the same non-material satisfaction as the taxpayer in the Horst case.‘ (Helvering v. Horst, 311 U.S. 112.)
The powers retained by the petitioner here were equally as broad as those retained in the Whiteley case. The petitioner points out that in the Whiteley case the income was to be paid directly to the grantor of the trusts, whereas in the instant case such amounts as are distributable are to be paid directly to the beneficiary. While the language of the trusts seems to support the petitioner in this, the fact is not controlling. We have here an intimate family group, such as was present in the Clifford case, supra, and it may fairly be presumed that the minor children would be amenable to their father's wishes with respect to the application of the income.
Other controls were retained over the trusts by the petitioner which further evidence his ownership thereof. In addition to the provisions relating to income, the trust instruments authorize the trustee to make ‘emergency‘ payments out of principal for the education, support, care, maintenance, and general welfare of the beneficiaries, thus subjecting the corpora of the trusts to the discharge of the petitioner's legal obligations. Cf. Frederick B. Rentschler, 1 T.C. 814.
During most of the period here involved the petitioner had also the power to alter or amend the manner of the distribution to the beneficiary. This power was limited only by provision that the trust should not be extended beyond the time when the beneficiary should reach the age of 40 and that the beneficiary should not be deprived of the principal of the trust estate. Until such time elapsed, however, the petitioner had complete control over the distribution of both the income and corpus and could withhold from the beneficiary or make distributions to him as he saw fit. This power over the corpus of each of the trusts is tantamount to a power to terminate the trust and to distribute the corpus to the beneficiary at will. We held in Lorenz Iversen, 3 T.C. 756, that such a power adds materially to the ‘bundle or rights‘ under which a grantor's liability under section 22(a) is imposed.
The cumulative effect of the rights retained by the petitioner compels the conclusion we have reached. We hold, therefore, that the respondent did not err in his determination in so far as that determination applies to the trusts of the petitioner's minor children.
With respect to the trust for the benefit of Michael J. Wyant, however, we are of the opinion that a different result is required. That trust was not for the benefit of a minor child of the petitioner. The beneficiary had already reached his majority at the time the trust was created. The trust made no provision for accumulation of income, but provided that such income should be paid to the beneficiary at monthly intervals for life. The petitioner had no right or power to receive the trust income or to have it applied in satisfaction of his own obligations. Thus he could not receive the economic benefits from this trust which he might derive from the trusts for the benefit of the minor children.
It is true that the petitioner retained the power by amendment to alter or amend the manner of distribution to the beneficiary. We do not think, however, that this is sufficient to warrant taxing the income of the trust to the petitioner. He did not have the power, as did the grantor in Commissioner v. Buck, 120 Fed.(2d) 775, ‘freely to sprinkle the income about among any beneficiaries he may select,‘ since here Michael J. Wyant was the sole beneficiary of the trust. Furthermore, he could not withhold all beneficial interest from the beneficiary and distribute it to the remaindermen, since it was provided that under no amendment to the trust could the beneficiary be deprived of the ultimate disposal of the principal of the trust estate. This circumstance distinguishes the instant case from Stockstrom v. Commissioner, 148 Fed.(2d) 491. In this respect the case at bar is more closely akin to Hall v. Commissioner, 150 Fed.(2d) 304.
We hold, therefore, that the petitioner did not retain such dominion or control over the trust for Michael J. Wyant as to render him taxable on the income thereof under section 22(a).
Decision will be entered under Rule 50.