Case Name: McCUTCHIN v. COMMISSIONER OF INTERNAL REVENUE
Court: United States Court of Appeals for the Fifth Circuit
Jurisdiction: United States
Decision Date: 1947-02-07
Citations: 159 F.2d 472
Docket Number: No. 11665
Parties: McCUTCHIN v. COMMISSIONER OF INTERNAL REVENUE.
Judges: 
Reporter: Federal Reporter 2d Series
Volume: 159
Pages: 472–478

Head Matter:
McCUTCHIN v. COMMISSIONER OF INTERNAL REVENUE.
No. 11665.
Circuit Court of Appeals, Fifth Circuit.
Feb. 7, 1947.
WALLER, Circuit Judge, dissenting.
R. B. Cannon, of Fort Worth, Tex., for petitioners.
Melva M, Graney, Sewall Key, and J. Louis Monarch, Sp. Assts. to Atty. Gen., Douglas W. McGregor, Asst. Atty. Gen., J. P. Wenchel, Chief Counsel, Bureau of Internal Revenue, and John W. Smith, S.p. Atty., Bureau of Internal Revenue, both of Washington, D. C., for respondent contra.
Before McCORD, WALLER, and LEE, Circuit Judges.

Opinion:
McCORD, Circuit Judge.
The Commissioner determined income tax deficiencies for 1940 against Alex McCutchin and Alma McCutchin, husband and wife, by including ill their community gross income the income from four trusts jointly established by taxpayers with community property in 1939. The Tax Court redetermined fine deficiencies, holding that taxpayers were not taxable oti income from two of the trusts in favor of their minor children, but that under Section 22(a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Ccde, § 22(a), and the Clifford Doctrine they were taxable on the income oí two trusts which named as beneficiaries Alex McCatchin's father and mother, J. A. and Carrie McCutchin.
The Commissioner has not appealed from that portion of the Tax Court's decision which determined that taxpayers were not taxable on income from the trusts in favor of the children; and the only issue before us is that raised by taxpayers' petition attacking the holding that they were taxable on the income from the J. A. and Carrie McCutchin trusts.
McCutchin Investment Company, a Texas corporation, was the trustee designated in each of the four trust instruments. It was organized for the purpose of receiving and managing the four trusts and was chartered just three days prior to the creation of the trusts. Incorporators were Alex McCutch-in and his wife and brother. The authorized capital stock of $25,000 was fully paid in cash, and Alex McCutchin owned all stock other than qualifying shares and was president of the corporation. The corporation had no employees or offices of its own.
Through his alter ego, McCutchin Investment Company, Alex McCutchin was for all practical purposes the active manager and trustee of each of the four trusts. Phipps v. Commissioner, 2 Cir., 137 F.2d 141. Moreover, each of the trust instruments contained provisions providing that ihe settlors could at any time designate a substitute trustee or trustees and that the settlor, Alex McCutchin, "may be and be^ come one of the trustees."
The trusts were expressly irrevocable. The settlors divested themselves of all interest in the trust property, and only in the event of death of both their children without issue did they have a reversionary interest. By terms of each of the trust instruments, the trustee took possession of the trust property with "full and complete power in the management, control, and disposition of the trust property as if it were the sole and absolute owner in fee simple The trustee was empowered to borrow money, execute mortgages and deeds, and lend money with or without security. The trustee was given the power to invest and reinvest funds, and could hold and manage, exchange or sell the trust property without disclosing the trusteeship.
The trust instruments naming the father and mother of Alex McCutchin as beneficiaries contain benefit provisions materially different from the provisions of the trusts in favor of the two minor children. The trusts in favor of the children provide specifically for the accumulation, reinvestment, and ultimate distribution of income and corpus to the children, but the trusts in favor of J. A. and Carrie McCutchin provide for them to receive only such portions of trust income or corpus as "in its uncontrolled discretion, the Trustee deems appropriate for the needs and welfare of the said primary beneficiary." During the taxable year the father and mother of Alex McCutchin received nothing from the trusts, although net income, before depletion, attributable to their trusts approximated $28,000. No payment was made until the year 1942 when Mrs. Carrie McCutchin began drawing $50 per month, apparently for her "needs and welfare
The trust instruments further provided that upon the death of the primary beneficiary (J. A. McCutchin in one trust, and Carrie McCutchin in the. other), the property and funds remaining in the respective trusts was to pass to the trusts for the min- or children, if such trusts were still in existence, or to the children if their trusts had terminated. J. A. McCutchin died in 1940, and property in his trust vested one-half in each of the trusts for the minor children of Alex and Alma McCutchin.
We find no merit in taxpayers' contention that our decision in Hawkins v. Commissioner, 152 F.2d 221, 222, 163 A.L.R. 745, demands reversal of the decision of the Tax Court in this case. In the Hawkins Case the taxpayer was not, as he is here, the trustee. The Hawkins Case, in applying Sections 161, 166, and 167 of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, § 161, 166, 167, recognized that facts other than those there presented might give rise to taxability under Section 22(a) and the Clifford Doctrine. "We recognize that a trust for relatives can be so contrived, especially when the settlor makes himself the trustee, as to be a mere family arrangement to divide the income in order to reduce surtaxes, the settlor retaining such control and benefits as to leave him still the. substantial owner." Cf. Helvering v. Stuart, 317 U.S. 154, 63 S.Ct. 140, 87 L.Ed. 154.
We agree with the Tax Court that under the facts and circumstances of this case the McCutchin Investment Company must be considered the alter ego of Alex McCutchin, and that he must be considered the actual trustee of the trusts. Through his corporation, of which he was president, Alex Mc-Cutchin had full management of the trusts. Indeed, Alex McCutchin's relation with the trusts was so intimate, his powers so broad, that in the taxable year he was able to borrow personally and without security $23,500 from his corporation. Moreover, the record discloses that in the taxable year he personally joined with his corporation in a joint purchase of certain oil properties — a transaction in which he, personally, and his corporation, as trustee, derived profits in fair proportions.
Acting as trustee through his corporation, Alex McCutchin exercised broad managerial powers which he had provided for as a settlor of the trusts. In addition to these powers, he could exercise broad discretionary powers under the "needs and welfare" provisions of the trusts to withold or distribute trust income or corpus to his father and mother, the named beneficiaries. These broad powers of the settlor-trustee, considered in the light of the intimate family relationship, make it apparent that settlors' economic position was not materially changed by the creation of the trusts. All the facts and circumstances authorized a finding of tax liability on the part of petitioners for the income of the two questioned trusts under Section 22(a) and the Clifford Doctrine. Stockstrom v. Commis sioner, 8 Cir., 148 F.2d 491, certiorari denied 326 U.S. 719, 66 S.Ct. 23; Stock-strom v. Commissioner, 8 Cir., 151 F.2d 353; Edison v. Commissioner, 8 Cir., 148 F.2d 810, certiorari denied 326 U.S. 721, 66 S.Ct. 25.
In a case of this kind, the Tax Court has full power to appraise all the facts and circumstances and make such final findings and conclusions as are warranted by the record. When such findings and conclusions are supported by the record evidence and are in accordance with law, they are binding on this court. Dobson v. Commissioner, 320 U.S. 489, 64 S.Ct. 239, 88 L.Ed. 248; Trust of Bingham v. Commissioner, 325 U.S. 365, 65 S.Ct. 1232, 89 L.Ed. 1670. Certainly, in this case it cannot be said as a matter of law that the Tax Court erred in its appraisal of the facts and circumstances, or that a "clear-cut mistake of law" is apparent. Cf. Stockstrom v. Commissioner, supra.
The decision of the Tax Court is affirmed.
Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788.
Findings and opinion of the Tax Court, 4 T.C. 1242.
The Trustee was expressly authorized and empowered "To invest and reinvest all funds coming into his hands as such Trustee and to change the form of any investment as frequently as it deems necessary or appropriate. In making investments, the Trustee shall not be restricted by any law now in existence, or here after adopted, regarding the character of investments which Trustees or other Fiduciaries may make, but may at all times invest in such lawful enterprises as the Trustee may deem appropriate, including joint enterprises, stocks, and securities of corporations, either organized or organizing, and any other lawful enterprise."