Court Opinion

ID: 4597762
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:19:51.72002+00
Date Added: 2024-06-11T07:51:51.167271
License: Public Domain

STERLING MORTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Morton v. CommissionerDocket Nos. 99967, 100899.United States Board of Tax Appeals45 B.T.A. 771; 1941 BTA LEXIS 1069; November 21, 1941, Promulgated *1069  Petitioner created a ten-year trust, terminable earlier under certain contingencies, income payable to his wife, with retention in himself of complete control over trust corpus.  Held, petitioner is taxable on net income of the trust under section 22(a), Revenue Acts of 1934 and 1936.  Helvering v. Clifford,309 U.S. 331">309 U.S. 331, followed.  B. M. Price, Esq., for the petitioner.  F. F. Korell, Esq., for the respondent.  HARRON *772  In these proceedings, consolidated for hearing and report, respondent determined deficiencies in income tax for the years 1935, 1936, and 1937 as follows: Docket No.YearDeficiency999671935$30,284.0310089919366,502.23100899193723,237.37The sole question is whether in the taxable years petitioner was taxable on the net income of a ten-year term trust created by him on December 24, 1934.  The facts have been stipulated.  FINDINGS OF FACT+ Petitioner is a resident of Lake Forest, Illinois.  He filed his income tax returns for 1935, 1936, and 1937, the taxable years, with the collector of internal revenue for the first district of Illinois.  On December 24, 1934, petitioner, *1070  as grantor, and the Bankers Trust Co. of New York, as trustee, entered into a trust agreement.  Petitioner transferred to the trustee as the trust corpus $190,000 in par value of 6 percent bonds of the Morton Building Corporation, due January 1, 1956, and 350 shares of the preferred stock of the Morton Salt Co.  The trustee was to pay the net income to petitioner's wife, Sophia P. O. Morton, for ten years.  At the end of ten years the trustee was to pay "any profits, without reduction for losses, which may have been derived from the sale or exchange" of trust corpus to petitioner's wife and all other trust corpus to petitioner.  If petitioner's wife died prior to the termination of the ten-year period, the trustee was to pay "any such profits" to petitioner's daughter, Suzette Morton, and all other trust corpus to petitioner.  Petitioner and his wife had the right to modify of terminate the trust at any time by an instrument in writing signed by both of them and delivered to the trustee.  In the event of such termination, the trustee was to pay "any such profits" to petitioner's wife and all other trust corpus to petitioner.  Petitioner had the right during his lifetime to direct*1071  the sale, exchange, investment, and reinvestment of the corpus without being limited to legal investments.  He had the power to appoint an agent *773  to exercise this right.  The trustee was to sell or purchase or exchange the corpus only in accordance with the directions of petitioner or his agent.  The trustee was to be fully protected in respect of any such purchases, sales, exchanges, investments, and reinvestments directed by petitioner or his agent and was not to be liable in any way for depreciation or loss incurred by reason of any such purchases, sales, exchanges, investments, or reinvestments, or by reason of its omission to take any action in the absence of such directions.  If petitioner appointed an agent, the trustee was to pay to the agent out of the income of the trust as compensation for his services such amounts as petitioner from time to time specified in writing.  The trustee also was to make payments from corpus on loans against insurance policies belonging to the trust in accordance with the directions of petitioner or his agent.  The trustee had the power, inter alia, without being limited to legal investments, and subject to petitioner's control*1072  of investments, to invest and reinvest in property of any character, and, without liability for loss, to lend money with or without security to petitioner's estate, and to purchase property of any character from petitioner's estate, and to retain such property for so long as it deemed it advisable, regardless of whether or not such property was a legal investment.  Petitioner paid a gift tax on the value of the future payments of income to be made to his wife under the trust agreement of December 24, 1934.  In 1934 petitioner created five trusts in addition to the trust created under the trust agreement of December 24, 1934.  Under three trusts the trustees were to pay the income to petitioner's wife for life; under one trust the trustee was to pay the income to petitioner's daughter, Suzette Morton, for life; and under one trust the trustee was to use the income to pay premiums on certain policies of insurance on the life of petitioner's wife.  In the taxable years the trust created under the trust agreement of December 24, 1934, realized no capital gains.  The net income of the trust in each of the taxable years was as follows: 1935$13,503.65193613,500.46193717,301.47*1073  In each of the taxable years the net income of the trust was paid by the trustee to petitioner's wife.  She included such net income in gross income on her income tax returns for 1935 and 1937, but did not do so on her return for 1936.  For 1936, petitioner included the trust income in gross income on his return.  He did not include any of the trust income for 1935 and 1937 in his returns for those years.  *774  None of the trust income was used to pay petitioner's obligations or to pay premiums on policies of insurance on his life or otherwise for his benefit.  In each of the taxable years petitioner paid the entire expense of the support and maintenance of his wife.  Petitioner's income tax returns for each of the taxable years showed net income as follows: 1935$227,953.301936216,443.801937222,411.03OPINION.  HARRON: The sole question is whether petitioner was taxable in 1935, 1936, and 1937 on the net income of the trust which he created on December 24, 1934.  Respondent determined that "under the provisions" of the Revenue Acts of 1934 and 1936 the net income of the trust was includable in petitioner's gross income for the taxable years*1074  1935 and 1937.  In his brief respondent contends, inter alia, that in all of the taxable years petitioner was taxable on the net income of the trust under section 22(a) of the Revenue Acts of 1934 and 1936 and in support of such contention relies especially on . The net income of the trust in the taxable years was, in our opinion, taxable to petitioner under the rule of the Clifford case.  The basic question, as stated in the Clifford case, is whether "the grantor after the trust has been established may still be treated * * * as the owner of the corpus" and the answer to that question depends "on an analysis of the terms of the trust and all the circumstances attendant on its creation and operation." With respect to the particular trust involved in the Clifford case, the Supreme Court stated that "the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by [the grantor] all lead irresistibly to the conclusion that [the grantor] continued to be the owner for purposes of section 22(a)." *1075  The rule of the Clifford case is applicable here, for the following reasons: During the life of the trust, the net income was to be paid, and was paid, to petitioner's wife.  Thus, the trust income was to remain within the grantor's own family group.  Petitioner retained substantially complete control over the corpus of the trust.  See ; ; . This is most evident from the terms of the trust reserving in petitioner or his agent the exclusive right to direct the sale, exchange, investment, and reinvestment of the trust corpus.  As a matter of fact the trustee could not make any purchases, sales, investments, etc., except under the direction *775  of petitioner or his agent.  Article 3 of the trust provides as follows: * * * So long as said right to control investments is retained by the Grantor, acting either himself or through his agent, no sales or exchanges or changes in investments of the trust estate shall be made by the Trustee, except on directions from the Grantor or his agent.  Petitioner could, at*1076  any time, by written notice, relinquish investment control to the trustee, but he could likewise, at any time, upon written notice, resume investment control.  There is nothing in the record to show that, from the time of the creation of the trust up to the present time, petitioner has ever relinquished investment control, nor is there anything in the record to show what changes, if any, have ever been made in the investments of the trust.  Further evidence of the extensive control retained by petitioner over the trust corpus is found in the fact that the trustee was under a duty to make payments out of principal of the trust on loans against any insurance policies belonging to the trust in accordance with the directions of the grantor or his agent.  During the taxable years, as far as the record shows, petitioner did not transfer any insurance policies to the trust, but he could have done so if he so desired, and if he had obtained, in advance, any loans under the insurance policies, the trustee could be required to apply the trust corpus in payment of such loans.  Also, petitioner could direct the trustee to pay out of trust income the compensation due any agent appointed by the*1077  grantor for his services.  The trust in question had a maximum limit of ten years.  It could be terminated before the expiration of ten years either by the death of petitioner's wife or by the joint action of petitioner and his wife.  Upon the termination of the trust the balance of the corpus was to revert to petitioner or to his estate after payment to petitioner's wife or his daughter of any profits realized from the sale or exchange of any of the securities constituting the trust corpus.  In the event of petitioner's death prior to the termination of the trust, the trustee is given very extensive powers to make loans to petitioner's estate and to purchase property from his estate.  See ; ; ; Cf. . The retention of control over the corpus by petitioner, the short duration of the trust, and the fact that the wife was the beneficiary, lead to the conclusion here that petitioner continued to be*1078  the owner of the trust corpus for purposes of section 22(a).  This case is controlled by the Clifford case.  See ; It is held that petitioner is taxable on the entire net income of the trust in each of the taxable years. The parties have stipulated that, in the event of decision in respondent's *776  favor, there are deficiencies in income tax in each of the taxable years in the stipulated amounts.  Accordingly, Decision will be entered in Docket No. 99967 that there is a deficiency in income tax of $23,908.90 for 1935, and in Docket No. 100899 that there are deficiencies in income tax of $1,962.87 for 1936 and $14,688.62 for 1937.