Court Opinion

ID: 4594733
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:13:33.791169+00
Date Added: 2024-06-11T07:59:23.162688
License: Public Domain

ELLIS H. WARREN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Warren v. CommissionerDocket No. 101332.United States Board of Tax Appeals45 B.T.A. 379; 1941 BTA LEXIS 1129; October 17, 1941, Promulgated *1129  On December 28, 1937, petitioner, as settlor, executed three indentures of trust, making himself sole trustee of each trust.  To each trust he transferred $2,500, which he deposited to the credit of the trust in a savings bank together with an executed copy of the trust indenture.  On the following day he contracted to sell to each trust 160 shares of stock of a corporation for a consideration of $60,000, $1,000 of which was paid in 1937 and the remainder to be paid over a period of 10 years.  Stock certificates were to remain with the petitioner as security for the purchase price.  The petitioner retained the right to vote the stock and had exclusive management of the trusts.  The income was to be accumulated or paid to the beneficiary in the absolute discretion of the petitioner.  Held, that the petitioner is liable to income tax for 1937 upon the income of the trusts for that year.  R. M. O'Hara, Esq., and Benjamin E. Jaffe, Esq., for the petitioner.  Philip M. Clark, Esq., for the respondent.  SMITH *379  This is a proceeding for the redetermination of deficiencies in income tax for 1936 and 1937 of $1,289.99 and $13,152.90, respectively. *1130  Several of the issues raised by the petition have been settled by stipulation of the parties.  The only question for the consideration of the Board is whether the petitioner is liable to income tax for 1937 upon the income of three trusts created by him on December 28, 1937, for the benefit of his wife, his daughter, and his son.  FINDINGS OF FACT.  1.  The petitioner is a resident of Flint, Michigan.  He filed his income tax returns for the years 1936 and 1937 with the collector at Detroit.  2.  On December 28, 1937, petitioner executed three indentures of trust.  One trust was for the benefit of his wife, Theresa Warren, one for the benefit of his daughter, Ruth Eleanor Warren, and one for the benefit of his son, Milton George Warren.  At the date of the execution of the trust indentures the daughter was 19 years of age and the son 13 years of age.  3.  In all material respects the trust indentures are identical.  That creating the Milton George Warren trust reads in material part as follows: KNOW ALL MEN BY THESE PRESENTS that I, ELLIS H. WARREN, of the City of Flint, County of Genesee, State of Michigan, (hereinafter sometimes called "Settlor"), for and in consideration*1131  of One Dollar ($1.00) and other good and valuable consideration duly received by me, and the receipt whereof is *380  hereby acknowledged, do hereby sell, assign, give, grant, transfer, convey and set over unto ELLIS H. WARREN, of the City of Flint, County of Genesee, State of Michigan, as TRUSTEE (hereinafter sometimes called "Trustee"), the monies, stocks, bonds and securities mentioned, listed or referred to in Schedule "A" hereto attached and identified by the signature of the Settlor and made a part hereof.  The property so listed in Schedule "A" and all additions to same and all investments purchased through the sale, exchange, conversion and mortgaging of same, is hereinafter sometimes called the "corpus of the trust." Said trustee shall take, have, control, hold and dispose of said corpus of the trust under and in pursuance hereof, IN TRUST, NEVERTHELESS, for the uses and purposes hereinafter stated, and no other, that is to say: 1.  The trusts hereof shall be irrevocable.  2.  The Trustee shall have full power and authority in respect of every trust estate mentioned in this instrument as follows: (a) To take possession of said corpus of the trust and collect and*1132  receive the moneys, interests, profits and income arising therefrom, with full power in the Trustee to manage the same as in the judgment and discretion of the Trustee may seem most advantageous to such trust estate and the beneficiaries thereof.  Included in such power of management shall be the power to vote, in person or by 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.  (b) To retain all property in the form in which the same shall be received by the Trustee, or at any time, to sell, exchange mortgage, pledge or partition the same or any part or parts thereof and invest and reinvest the proceeds from time to time, and keep the same invested in securities or other personal property.  (c) To borrow money and contract indebtedness upon the security, mortgage or pledge of the corpus of the trust or any portion thereof, and to make loans to persons, firms or corporations upon security, mortgage or pledge.  * * * (h) To carry on sale, purchase, exchange, loan, pledge, mortgage and other transactions with the settlor and without limiting the generality of the foregoing, *1133  to use property of the trust estate to purchase assets from the Settlor, to make sales of property in the trust estate to Settlor, and to make loans upon ample security and at the market rate of interest to Settlor.  (i) To pay from time to time, from the income of the trust estate, all necessary and proper costs, expenses and charges incurred in connection with the management, care and preservation of such trust property and estate, including reasonable fees and compensation of the Trustee, and his attorneys, agents and employees.  3.  The Trustee shall not be liable for any losses that may come to said trust property, either in principal or income, in connection with any securities or property conveyed to the Trustee by the Settlor or investments made by the Trustee, provided such loss has not occurred through the gross mismanagement or wilful default of said Trustee.  * * * 5.  The Trustee is hereby vested with full and complete title to all of the securities, property and estate hereby transferred to said Trustee, until the termination of said trust and until such trust property shall be actually paid over, transferred and delivered to the persons entitled as beneficiaries*1134  hereunder; and no person entitled as beneficiary hereunder - either to the corpus *381  of said trust upon the termination, or to the income therefrom during the continuance thereof - shall take or have any title to or interest in such corpus or income until the same shall be actually received in possession by such person.  No disposition, charge or encumbrance by way of anticipation of such trust corpus or the income therefrom, or any part thereof, by any person who may be designated as beneficiary hereunder, shall be of any validity or legal effect, or be in anywise regarded by said Trustee, nor shall the interests of any beneficiary be in any way liable for any claim of any creditor or of any other person to whom such beneficiary may be in any way obligated.  * * * 8.  The discretion and judgment of the Trustee, exercised under any of the provisions of this Trust Instrument, in distributing or accumulating income and the time and amount of accumulation or distribution shall be final for all purposes.  4.  The trust for the benefit of petitioner's wife terminates and the corpus is distributable to her as her absolute property upon the death of the petitioner.  As to the*1135  trusts for each child, the corpus is distributable to her or him as her or his absolute property when each shall attain the age of 35 years, except that if the petitioner is still living the trusts shall continue until his death, when the beneficiary is to receive the corpus as his absolute property.  5.  The income of all three trusts during their existence is to be accumulated or distributed in the discretion of the trustee.  6.  Under the terms of all three trust instruments, provision is made for gifts over if the named beneficiary dies before the distribution of the corpus to such beneficiary.  7.  As to the trusts for the children, petitioner's wife, Theresa Warren, is named as successor trustee in the event of petitioner's death or disability; or in the event of the death, disability, or refusal to serve of petitioner's wife, the majority of the beneficiaries then of age are empowered to designate a successor trustee.  8.  The corpus of each trust was $2,500.  On December 28, 1937, petitioner deposited to the credit of each trust $2,500 in a savings account in the Genesee County Savings Bank of Flint, Michigan.  Executed copies of the trust indentures were also deposited*1136  with the bank and have been with the bank practically ever since.  9.  On December 29, 1937, petitioner, as trustee, entered into agreements with himself for the purchase from himself of 160 shares of stock of the Standard Cotton Products Co. at a consideration and under terms that will be set out hereinafter.  The petitioner was a stockholder, director, and officer of that company.  10.  Prior to December 29, 1937, petitioner owned 800 of the 2,400 shares of the outstanding capital stock of the Standard Cotton Products Co.  Of the remaining shares, 800 shares were owned by L. H. Green, as trustee, and 800 by O. M. Banfield.  At about the time the petitioner created the aforesaid trusts, Banfield also created three trusts *382  for the benefit of his wife and two children.  The trust indentures executed by Banfield were of a tenor like those executed by the petitioner.  11.  The price at which petitioner on December 29, 1937, sold to each trust 160 shares of stock of the Standard Cotton Products Co. was $375 per share, or a total consideration of $60,000.  This was the fair market value of the shares at the time.  12.  Under the terms of the sales agreements each trust*1137  was to pay to petitioner $1,000 upon the execution of the agreement and the delivery of the stock certificate, and the balance of $50,000 was payable in 10 equal annual installments of $5,900 each, commencing on December 1, 1938, with interest at 3 percent per annum on each installment from December 29, 1937, to the date of payment.  The stock was transferred on the corporation's books on or about December 29, 1937, and three certificates for 160 shares each were issued in the name of the trustee for each of the three trusts.  The initial payment of $1,000 was made by each trust on December 29, 1937.  Since then, and commencing in 1938, each trust has paid petitioner the agreed annual installment of $5,900.  13.  Petitioner reported the sales of Standard Cotton Products Co. stock on his 1937 return and accounted for his profit on the installment basis.  In that return petitioner reported 58.173 percent of the cash received as realized gain, and, since he had owned the stock for a period of five years, he accounted for 40 percent of the realized gain from the sale of the 480 shares.  14.  Each of the sales agreements of December 20, 1937, provided that the trustee, after receiving*1138  delivery of the certificate for the shares of Standard Cotton Products Co., should deliver possession thereof to petitioner as additional security to him for the payment of the balance of the purchase price.  15.  On December 9, 1940, petitioner, in his individual capacity and as trustee, executed amendments to each of the trust indentures.  By these amendments the provision of each trust indenture respecting the power of the trustee to make loans to petitioner was canceled and stricken, and the power of the trustee to purchase from or sell to petitioner assets of the trusts was qualified so as to make it necessary that any such transaction first be submitted to a court of competent jurisdiction and the approval and an order of said court obtained upon a showing that the transaction or transactions would be for the benefit and advantage of the beneficiaries under the trust indenture.  16.  The amendments, in addition, canceled and removed from each of the trust indentures the provision limiting the liability of the trustee for any losses which might come to the trust estates.  17.  Also, on December 9, 1940, the petitioner, in his individual capacity and as trustee, executed*1139  amendments to the sales agreements *383  of December 29, 1937, in the case of each trust.  By those amendments there was canceled, stricken, and removed from each of the sales agreements the provision under which petitioner was entitled to possession of the certificates of stock as security for the payment of the balance of the purchase price and petitioner surrendered possession of such shares of stock to the trustee.  18.  The income of the three trusts since their formation has consisted of dividends on their holdings of stock of the Standard Cotton Products Co. and interest on bank deposits.  19.  The dividends received by the trustee have been deposited to the credit of the bank account maintained for each trust.  20.  No distributions of trust income had been made prior to the date of this proceeding (April 7, 1941) to the beneficiaries of the Theresa Warren trust and the Milton George Warren trust.  Commencing in October 1940, the trustee made distributions to Ruth Eleanor Warren of $100 per month out of the income of the trust for her benefit.  She was married in September 1940 and was then more than 21 years of age.  21.  With respect to the power of the trustee*1140  to make loans to the petitioner, no such loans have ever been made since the creation of the trusts; neither has petitioner ever purchased any assets from the trusts.  22.  Complete books of account are kept by the trustee for each of the three trusts, in which are recorded all transactions relating to the trusts.  23.  On December 30, 1937, each trust received a dividend of $5,000 on the 160 shares of stock of the Standard Cotton Products Co. purchased from petitioner.  The petitioner, as trustee, filed income tax returns for each of the three trusts for 1937 and paid taxes on such dividends.  24.  Respondent in his deficiency notice has included these dividends in the aggregate amount of $15,000 in the gross income of the petitioner.  OPINION.  SMITH: The question presented by this proceeding is whether the petitioner is liable to income tax for 1937 upon the income of the three trusts which he created on December 28, 1937.  It is the respondent's contention that the petitioner is liable to income tax upon such income under section 22(a) of the Revenue Act of 1936, which includes in "gross income" all: * * * gains, profits, and income derived from * * * professions, vocations, *1141  trades, businesses, commerce, or sales, or dealings in property, whether real or personal, growing out of the ownership or use of or interest in such property; also from interest, rent, dividends, securities, or the transaction of any business carried on for gain or profit, or gains or profits and income derived from any source whatever.  * * * The *384  question before us is whether the petitioner was in substance the owner of the trust assets within the meaning of section 22(a) of the statute.  The respondent in his deficiency notice cites ; affd., ; ; and . Since the respondent issued his deficiency notice in this case the United States Supreme Court has rendered its opinion in . That case involved the question whether the creator of a short term trust for the benefit of members of his family was liable to income tax upon the income of the trust.  The Court held that he was and said: * * * where the grantor is the trustee and the beneficiaries*1142  are members of his family group, special scrutiny of the arrangement is necessary lest what is in reality but one economic unit be multiplied into two or more by devices which, though valid under state law, are not conclusive so far as § 22(a) is concerned.  It further said: * * * We have at best a temporary reallocation of income within an intimate family group.  Since the income remains in the family and since the husband retains control over the investment, he has rather complete assurance that the trust will not effect any substantial change in his economic position.  It is hard to imagine that respondent felt himself the poorer after this trust had been executed or, if he did, that it had any rational foundation in fact.  For as a result of the terms of the trust and the intimacy of the familial relationship respondent retained the substance of full enjoyment of all the rights which previously he had in the property.  * * * The bundle of rights which he retained was so substantial that respondent cannot be heard to complain that he is the "victim of despotic power when for the purpose of taxation he is treated as owner altogether." * * * *1143  The petitioner contends that the facts which obtain in this case are materially different from those which obtained in  He points out that the trusts which he created are long term trusts, continuing at least for the life of the petitioner and perhaps longer, while the Clifford trust was only a five-year trust.  He alsocontends that there was no provision in the trust indenture by which the principal or the income could ever be enjoyed by him.  The income of a long term trust, as of a short term trust, may be taxable to the grantor.  See , which dealt with an irrevocable trust, the income of which was to be paid to the grantor's wife as long as she lived; also, , and . It all depends upon the degree of control which the grantor has over the trust. We do not think that it is material that there is no provision of the trust instruments by which either the income or the corpora of the trusts would ever revest in the petitioner. *1144  See The petitioner did have the right to buy and sell to the *385  trusts property at prices to be determined by himself.  In , such a right was held to be equal to a power of revocation.  In our opinion in that case we relied upon . The simple facts here are that these trusts were created by the petitioner for the benefit of his wife and children, his heirs at law.  No one outside of the family had any rights in or any control over the trusts.  The mere fact that they were declared to be irrevocable is of little importance.  The petitioner does not claim that he did not have the right to modify the trusts and the evidence shows that on December 9, 1940, he did modify them, although he claims that the modification was only for the protection of the beneficiaries of the trusts.  In , the court said: * * * the court must look to the whole nexus of relations between the settlor, the trustee and the beneficiary, and if it concludes*1145  that in spite of their changed legal relations the three continue in fact to act and feel toward each other as they did before, the income remains the settlor's; * * * We think that the facts that obtain in the instant case are such as those stated by the court that would make the income of the trust taxable to the settlor.  After the creation of the trusts the petitioner and he alone had absolute control of the trust assets.  He was not required to distribute any part of the income to any of the beneficiaries during his lifetime.  He had absolute voting rights of any shares of stock which became a part of the trust estates.  He had as much or greater control over the trust assets than did the taxpayer in the case of , in which we said: * * * He does control the form and manner of the investment of both principal and undistributed income.  And he does remain in a position to participate in the affairs of the business in which he is actively interested, a prerogative which proceeds from the retained equivalent of ownership of his interest in that enterprise.  This is an attribute of proprietorship frequently of greater significance*1146  than the right to receive income.  * * * In the case of a family trust of short duration, where the corpus of the trust is to return to the grantor upon the expiration of a few years, the degree of control held by the grantor is unimportant.  In the case of a long term trust, however, it must appear that the grantor has a greater degree of control over the trusts.  This fact was recognized in , where the court said: * * * while it is true that the prime consideration is whether the income remains within the family, there are two other circumscribing factors; the length of the term and the powers of management reserved to the settlor.  * * * the longer the term, the more important the reserved powers, and vice versa.  * * * As *386  indicated above, the petitioner and no one else during his life had control over the trust assets, both principal and income.  The facts in this case bring it clearly within the ambit of the opinion of the Supreme Court in  See *1147 ; ; ; . We approve the respondent's determination that the petitioner is liable to income tax for 1937 upon the income of the three trusts created by him during that year.  Reviewed by the Board.  Decision will be entered under Rule 50.KERN concurs only in the result.  ARUNDELL dissents.