Court Opinion

ID: 4497747
Source: CourtListenerOpinion
Date Created: 2020-01-23 18:15:35.359277+00
Date Added: 2024-06-11T14:54:15.313782
License: Public Domain

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dissenting: I agree with the majority opinion that section 166 of the Revenue Act of 1934 is inapplicable, the trusts specifically stating that same are irrevocable, and agree further that there was no liability upon the trustor, Edwin Berolzheimer, for the support of his son after majority and, therefore, the income of the trust is not taxable to him. Moreover, I think the principle of Douglas v. Willcuts, 296 U. S. 1, was properly applied as to $9,600 of the income of the trust set up by Alfred Berolzheimer. But 1 am unable to agree in the other conclusions of the majority. The broad powers given to the trustor-trustee, his freedom from legal restriction as to investments and from all liability, except for willful wrongdoing, destroyed reality of the trust, in my opinion. I can not reconcile the conclusion here with those in Benjamin F. Wollman, 31 B. T. A. 37, and William C. Rands, 34 B. T. A. 1107, as to breadth of powers remaining in the trustor, for the essential elements of the trusts therein and herein differ in no real sense. As to freedom from legal restrictions and liability, petitioners seek to nullify the exculpatory clauses by reference to state decisions involving litigation between parties to trusts and indicating unenforce-ability of such clauses. The question as to whether trusts might be unenforceable between parties in the state tribunal is not controlling here upon a question of reality of trust where grantor is trustee. Lyeth v. Hoey, 305 U. S. 188, summarizes the rule as follows:
In dealing with the meaning and application of an act of Congress enacted in the exercise of its plenary power under the Constitution to tax income and to grant exemptions from that tax, it is the will of Congress which controls, and the expression of its will, in the absence of language evidencing a different purpose, should be interpreted “so as to give a uniform application to a nationwide scheme of taxation.” Burnet v. Hormel, 287 U. S. 103, 110. Congress establishes its own criteria and the state law may control only when the federal taxing act by express language or necessary implication makes its operation dependent upon state law. * * *
*649In Morgan v. Commissioner, 103 Fed. (2d) 636, it was held that the definition of a power of appointment within the meaning of section 302 (f) of the Revenue Act of 1936, as amended, is a matter of Federal law and not of state law. We, therefore, in interpreting the Federal statute as to a trust, should not be bound by state decisions. In Equitable Life Assurance Society v. Bowers, 87 Fed. (2d) 687, it is said:
* * * But generally speaMng our revenue statutes make their own definitions, and are not to be assumed to accommodate themselves to local variants. * * *
I think that Congress addressed itself, in the revenue law, to real trusts and not shams, and that we should not follow or approve something which has the mere habiliments, but not the body, of a trust, the mere name of trust without the elements of responsibility and good faith regard for a beneficiary for which equity has regard.
In Stoddard v. Eaton, 22 Fed. (2d) 184, we read:
The contention of the plaintiff is that the so-called “trust agreements” worked no severance of the trusteed securities from the corpus of the plaintiff’s property, and that these securities, whether in the hands of the trustees or not, were always his own assets, and therefore that the losses sustained on their sale were proper items of deduction from his gross income. Be says that the verbal form of the transaction does not necessarily control the construction to be placed upon it; that the envvrommg conditions — the motivation, the reactions of the parties to the situation thus integrated and to its developing phases — all have a significance which the law must evaluate before the genuine relation of the transactions to the Income Tax Act may be ascertained. With this suggestion, stated in these general terms, I am disposed to agree. For we are not here concerned with the rights of contracting parties who may evoke a rule of estoppel to prevent the change of a comma in the written bond, nor are there innocent third parties involved who have relied upon a title or upon an authority expressed in writing.
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After all, the word “trust” as used in section 219 of the Revenue Act of 1918 (Comp. St. § 6336-1/8Ü), can hardly have been intended to comprehend every instance in which a trust is recognized in equity. A trust ex maleficio, a resulting trust, or a constructive trust are examples of trusts which do not fit into the frame of the statute. A trust, as therein understood, is not only an express trust, but a genuine trust transaction. A revenue statute does not address itself to fictions. [Italics supplied.]
Petitioners, when they take refuge behind the idea that the courts do not recognize the exculpatory clauses involved in the trusts herein, tacitly admit that the instruments herein violate the essential law of trusts. "We should not be so wedded to the mere term “trust” as applied to an instrument as to disregard the essential requirements of trusteeship.
It seems to me also that section 167 (a) (1) of the Revenue Act of 1934 clearly applies here. The trust instrument provides that “all proceeds of the sale, redemption or other distribution of assets *650included in the principal of the trust shall be received, held and considered byi him [the trustee] as part of and in addition to the corpus”, and the corpus at the end of the trust period under the instrument goes to the trustor. It is true that the provision as to proceeds of sale or disposition of assets being considered corpus is subject to the expression, “all, however, to the extent permitted bylaw”, etc., but we know of no law prohibiting a trust from providing that the net income to be distributed shall not include profits from sale of corpus, so that the above provision of section 10 of the instrument is not eliminated by the reference to “the extent permitted by law”, etc. Of course the fact that such trust provisions are permitted by law does not mean that the income from such trusts can not by the revenue law be attributed to and taxed to the trustor. Both sections 166 and 167 apply to trusts which may be entirely effective for purposes other than income taxation. Petitioner points out section 17 (a) of the Personal Property Law of New York, but that section affects only stock dividends, stating that, unless otherwise provided in a trust instrument, they shall be corpus. We are here concerned with sale or disposition of trust assets. We held in William C. Rands, supra, that the trustor therein in legal effect accomplished only an assignment of future income, for he provided not a full and complete transfer of the corpus to the trustee, so that the beneficiary should receive all of the benefits of such corpus, but a specific limit upon such benefits by deleting therefrom what might well have been the more important part, to wit, profits from sale or disposition of corpus, retaining these for himself when same, as corpus, were delivered to him upon the termination of the trust. We held therein that in this he retained such a highly important attribute of ownership as indicated that the trust lacked substance and reality. Since the trust instrument retains by a specific provision, as corpus, the proceeds of sale or disposition of trust assets, and provides that such corpus is to be paid to trustor at termination of trust, it is plain that the instrument does in fact provide, in the words of the statute, that:
* * * income of a trust—
(1) is * * * held or accumulated for future distribution to the grantor. * * *
In Henry A. B. Dunning, 36 B. T. A. 1222, we relied in part upon the fact that corpus was not retained for distribution to grantor, in holding the trust effective for income tax purposes. Petitioner contends, however, that under the law of New York proceeds of sale or disposition of trust assets were corpus, and that we are, therefore, bound so to hold. As above discussed as to meaning of trust, the fact that state law denominates such funds as corpus is not conclusive when, as here, we are interested in whether such funds are *651“income of a trust” within the purview of section 167. If, although called, corpus by the state law, the proceeds of sale or disposition of trust assets are income of the trust, then it is plain that they are under the ban of section 167 (a) (1), as being held or accumulated for future distribution to petitioner. Such proceeds do constitute income of the trust — Arthur Letts, Jr., 30 B. T. A. 800; affd., 84 Fed. (2d) 760; Old Colony Trust Co. et (A., Executors, 38 B. T. A. 828. In Preston B. Bassett, 33 B. T. A. 182, 185, we said that “capital-gain, although under local law not ‘income’ of the trust, would clearly be income under the Federal statutes.” Moreover, in Commissioner v. Morris, 90 Fed. (2d) 962, wherein section 167 of the Bevenue Act of 1928 was considered in connection with the question as to whether capital gains from sale of trust assets were corpus or trust income, the court points out that, although section 167 of the Bevenue Act of 1928 did not apply to income from such capital gains absolutely distributable as principal at termination of trust, the same would not be true under section 167 of the Bevenue Act of 1932 — which is the same as in the 1934 Act.
In my opinion, trust income was accumulated for the grantor, and he, for that additional reason, is taxable upon the income involved herein. I dissent.