Court Opinion

ID: 4629394
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:05:19.376789+00
Date Added: 2024-06-11T07:59:56.974001
License: Public Domain

JOHN N. FULHAM, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fulham v. CommissionerDocket No. 103252.United States Board of Tax Appeals44 B.T.A. 1183; 1941 BTA LEXIS 1218; August 6, 1941, Promulgated *1218  On December 27, 1935, the Mary E. Fulham trust, which is set out in 40 B.T.A. 48">40 B.T.A. 48, was amended so as to forever preclude any part of the corpus, income or accumulations of the trust fund from vesting in or revesting in or being paid to the grantor under any circumstances, or to give to the grantor any benefit in the trust fund, direct or in direct.  Held, no part of the income of the trust is taxable to the grantor under the provisions of sections 166, 167, or 22(a) of the Revenue Act of 1936.  Commissioner v. Branch, 114 Fed.(2d) 985, followed.  Lawrence E. Green, Esq., for the petitioner.  E. M. Woolf, Esq., for the respondent.  BLACK *1183  This proceeding involves an income tax deficiency of $1,943.24, determined by the respondent against petitioner for the calendar year 1936.  The deficiency is due to increasing petitioner's reported net income by three items, as follows: (a) Fees received$101.39(b) Trust income6,495.91(c) Capital gain36.17*1184  Error is assigned only as to adjustments (a) and (b).  Regarding adjustment (a) the parties have stipulated: If it is decided*1219  by the Board that the income of said Mary E. Fulham Trust should be included in determining the net taxable income of Petitioner, the deficiency should be determined by eliminating the sum of $202.78 from the adjusted net income shown in the deficiency letter, said sum representing twice the amount of trustee's fees of $101.39 received by Petitioner as trustee of the Mary E. Fulham Trust, erroneously added to instead of subtracted from Petitioner's income by Respondent in computing the deficiency shown in the ninety-day letter.  The taxability of the income for the taxable year 1935 to petitioner as settlor-trustee of the Mary E. Fulham trust was before us in a prior proceeding and we held that the income was taxable to petitioner on the ground that the trust could be revoked by those who had no adverse interest.  See ; affd., . And in a statement attached to the deficiency notice now before us the respondent said: Inasmuch as the United States Board of Tax Appeals has held that the Mary E. Fulham Trust, so-called, which you created on April 11, 1930 is a revocable trust, the entire net income of the trust, *1220  after adjustment, has been included in your taxable income herein, in accordance with said decision.  (See John N. Fulham, Petitioner v. Commissioner of Internal Revenue, Respondent, 40 B.T.A. (Advance Sheets) No. 13.) On December 27, 1935, however, the Mary E. Fulham trust was amended in certain important respects.  It is petitioner's contention that the amendment changes the situation from what was before us in the prior proceeding and that we should now hold that the income of the trust is not taxable to him.  The respondent has filed an amendment to his answer alleging that "In support of said determination the respondent relies not only on the provisions of Section 166 but also on Sections 167 and 22(a) of the Revenue Act of 1936." FINDINGS OF FACT.  Petitioner is an individual, residing at Winthrop, Massachusetts, and filed his income tax return with the collector of internal revenue for the district of Massachusetts.  He was married to Mary E. Fulham, and throughout the year 1936 she and five children were living.  Petitioner is the grantor of a certain trust created April 11, 1930, by a transfer of securities to petitioner and Dudley H. Dorr, as trustees. *1221  Under the terms of the original trust indenture the trustees were directed to accumulate the income of the trust until the death of Mary E. Fulham, petitioner's wife, with discretion to pay to her any part of the whole of the principal and accumulated income during her life.  Upon the death of Mary E. Fulham the trustees were *1185  directed to divide the fund into shares for the children and issue of deceased children by right of representation, and it was provided that "The trustees shall pay quarterly or oftener to each of such living children until he reaches the age of twenty-five years the net income of his share." The shares of the issue of deceased children were to be paid outright to such issue upon the death of Mary E. Fulham.  If a child survives her and dies before reaching twenty-five years, his share is to be paid to his issue, or, if he leaves no issue him surviving, then to the other children or their issue then living, by right of representation.  The trustees were given discretion to expend a beneficiary's share of income or principal "for the use or benefit of any beneficiary", or in their discretion they could accumulate the income and distribute it later. *1222  The beneficiaries' interests are inalienable and not subject to be reached by creditors.  The trustees also have power to hold the share of any issue of deceased children in trust until such issue is twenty-one.  Since this provision may cause the trust to last beyond the period of perpetuities, there is a provision that all interests shall vest at the latest twenty-one years after the death of the survivor of the petitioner's wife and children living at the date of the creation of the trust, and that the principal and accumulated income of each share be then distributed to the persons then entitled to the income of the share.  Clause fourth A of the trust instrument provides that Dorr shall keep the books of account and shall be the managing trustee while living.  Clause fourth B conferred upon the trustees the following powers, rights and exemptions: B.  All trustees shall have the same power of disposition of and management over the property as if they were the absolute owners free of all trust.  Without limiting such powers, they shall specifically have power to buy, exchange, sell, pledge, mortgage, invest, reinvest, and borrow, when, as how, and what they please irrespective*1223  of rules of law, including the power to lend money to any person including any trustee or beneficiary with or without security, to lease for terms longer or shorter than the active trusts, to compromise or arbitrate any matter, to decide irrespective of rules of law what is income and principal, and all questions between income and principal, and all questions between persons successively entitled to income, to hold and carry real and personal property in any name without indication of any trust, to hold, manage, and invest trust funds or shares in one fund or divided in such way as the trustees may choose; and in distributing the trust funds among the beneficiaries to distribute wholly or partially in kind and/or to sell to distribute, with power to transfer investments and to convey real estate or any interest therein (whether separate or undivided) as part or the whole of the share of any person with or without transferring or conveying similar property to any other person at such valuations as the trustees shall deem just, which valuations shall be conclusive.  *1186  The trustees have power to execute, deliver, and acknowledge all necessary papers incident to any of their*1224  powers and authority.  a committee of three persons was appointed with a joint power in any two of them to alter, amend, or revoke the trust.  Vacancies in the committee are to be filled by an instrument in writing signed by a majority of the remaining members.  The committee also has the power to alter the number of, powers of, and succession among the trustees and the committee.  On June 25, 1932, the committee, by an instrument in writing signed by all three of them, restricted their power to alter the trust instrument in any manner so as to revest in petitioner any part of the corpus or income of the trust fund unless the exercise of such power is consented to in writing by Mary E. Fulham.  The committee's power to amend this provision was relinquished and extinguished as provided under the terms of the original power granted to the committee.  On December 27, 1935, the trust was further amended, which amendment is as follows, omitting the signatures: We, JEANIE L. RONALD, ARTHUR L. PARKER, and NICHOLAS L. FULHAM, being the Committee created by the trust instrument executed by JOHN N. FULHAM on April 11, 1930, by this writing signed by us and delivered by us to DUDLEY H. *1225  DORR, one of the trustees under said trust instrument, hereby take the following action: (1) We hereby make the following alteration in the trust instrument, as amended: No part of the income of the fund, as that word is used in the Federal Revenue Act, applicable from time to time, shall be held or accumulated for future distribution to JOHN N. FULHAM or so that under any circumstance or contingency it shall inure to the benefit of JOHN N. FULHAM; and no provision of the trust instrument as at any time amended shall have effect so that any income is, may or can under any circumstance or contingency be held or accumulated for future distribution to JOHN N. FULHAM or inure to his benefit.  If any such income is undisposed of by the provisions of the trust instrument as at any time amended (including the preceding sentence) it shall pass to such of JOHN N. FULHAM'S wife, relatives by blood of any degree, or any person married to any such relative at any time whether at the time of any exercise of said power of appointment or prior thereto, in such proportions and amounts and subject to such trusts and provisions as the Committee shall from time to time, but at the latest one year*1226  after the death of JOHN N. FULHAM, appoint; and in default of such appointment, to JOHN N. FULHAM'S next of kin, or, if he dies unsurvived by next of kin, to such corporations, trusts, community chests, funds, or foundations organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, no part of the net earnings of which inures to the benefit of any private shareholder or individual, and in such proportions and amounts as the trustees in their uncontrolled discretion shall decide.  Any power of appointment of the kind above set forth by the Committee shall be exercised in the manner set forth in the trust instrument as amended, for the exercise of the joint power given to it.  *1187  (2) We hereby strike out the first sentence of paragraph E of Clause Third of the original trust instrument and insert in lieu thereof the following: So far as the trustees are directed to pay income to any beneficiary who is a minor they may in their discretion expend the same for his or her use or benefit, and they shall have full power to determine what expenditures are for the use or benefit of any beneficiary.  (3) We add to Clause First*1227  of the original trust instrument the following: No such payment made to MARY E. FULHAM shall relieve JOHN N. FULHAM of his legal obligation to provide suitable support for her; but all such payments received by her shall be used by her for such purposes as she wishes.  (4) We hereby release and relinquish any power which the Committee has under any circumstances, either by action of all or some of its members alone or with the consent or participation of any person, to vest in, revest in or pay to the grantor under any circumstances, any part of the corpus, income or accumulations of the trust fund, or to give to the grantor any benefit in the trust fund, direct or indirect.  * * * No part of the income or corpus of the trust has ever been paid to petitioner.  Dorr, as provided in clause fourth A of the trust, has continuously served as managing trustee of the trust and has kept the books of account.  As managing trustee he has looked after the making of new investments and has done all the things that, normally, a managing trustee would do.  Petitioner's activities as trustee have been negligible.  Dorr has from time to time advised petitioner of certain investments he intended*1228  to make and petitioner has always agreed with Dorr relative thereto.  All the securities of the trust are carried in Dorr's name.  This was done so any transfers of the trust could be easily made.  Dorr votes the stock where voting is required and also makes out the income tax returns for the trust.  The investments are made for permanent investments as much as possible, as no early distribution of the trust corpus is contemplated.  The annual income is all accumulated.  No part of it has been paid to anyone, and none of the trust funds have been loaned to any individual.  Of the compensation paid to the trustees, petitioner receives two-fifths and Dorr three-fifths.  The trustees have never made any investments in insurance policies.  Petitioner has never directed the sale of any of the trust securities.  Dorr has never delegated any of his powers as managing trustee.  OPINION.  BLACK: Is the income of the Mary E. Fulham trust for the calendar year 1936 taxable to petitioner under any of the provisions of sections *1188  166, 167, or 22(a) of the Revenue Act of 1936?  These sections are printed in the margin. 1*1229  We think the amendment to the trust dated December 27, 1935, which was in full force and effect throughout the taxable year 1936, clearly precludes the taxation to petitioner of any of the income of the trust under either section 166 or 167 of the Revenue Act of 1936.  After that amendment became effective there was vested in no person any "power to revest in the grantor title to any part of the corpus of the trust." After that amendment there did not exist even a possibility of a reverter to the grantor or his estate.  It was thereafter impossible to hold, accumulate, distribute or apply to the payment of premiums upon policies of insurance on the life of the grantor any part of the income of the trust.  Furthermore, the trust could never thereafter be amended so as to allow the grantor to receive any benefit from the trust, either directly or indirectly.  Although in his amendment to his answer the respondent alleges that he "relies not only on *1189  the provisions of section 166 but also on sections 167 and 22(a) of the Revenue Act of 1936", in his brief he offers no argument in support of taxing the income of the trust to petitioner under section 166 or 167, but relies*1230  entirely upon taxing the income to petitioner under the provisions of section 22(a), citing as authority therefor the two cases of , and . In view of the 1935 amendment to the trust, we hold that petitioner is not taxable on the income of the trust under either section 166 or section 167, supra.  ; , affirming . Is petitioner taxable on the income of the trust under section 22(a)?  The answer depends upon whether the principles enunciated in , are applicable.  The respondent contends that the powers which petitioner reserved to himself as one of the cotrustees under clause fourth of the trust deed bring this case within the ambit of the Clifford and Stein cases.  The powers referred to in clause fourth B of the trust deed, which are set forth fully in our findings of fact, are not such powers as in our opinion the Supreme Court intended would alone be decisive of the determination of*1231  ownership in the grantor for purposes of section 22(a).  These powers are no broader than the powers given to the trustees in , wherein it was held that the grantor was not taxable on the income of the trust there in question although the grantor in that case was one of the trustees capable of exercising those powers.  Nor do we think the powers conferred upon the trustees in the instant case were any broader than those conferred upon the trustees in ; affirmed per curiam in . Of the trustees' powers in the Palmer case, we said: "Those powers which petitioner as grantor reserved to himself as one of the trustees relate to the management of the trust corpus and do not vest in the grantor any control as an individual over the economic benefits or enjoyment of the trust property.  [Citing cases.]" The Supreme Court in the Clifford case particularly pointed out that no one fact was normally decisive of the question.  In the instant proceeding it is hard to see in what way the grantor remained the owner after the 1935*1232  amendment.  Thereafter the Fulham trust was substantially different from the Clifford trust.  The trust in the Clifford case was for a short term of five years, whereas the Fulham trust was to continue as long as the rule against perpetuities permitted.  Upon termination of the Clifford trust the corpus was to go to the grantor, whereas under the Fulham trust under no possible contingency could either the corpus or income ever revert to *1190  or be used for the benefit of the grantor or his estate, either directly or indirectly.  In the Clifford case the grantor was the sole trustee, whereas in the case now before us petitioner and another not related to him in any way were trustees.  Dorr was the managing trustee.  Clause fourth A provided that "While said Dorr is living he shall keep the books of account, and shall be the managing trustee." Dorr testified at the hearing that he has managed the trust since its inception and that petitioner has done no more than to consent to what Dorr has done.  In the recent case of *1233 , the Second Circuit held that the income of the trust there involved was taxable to the grantor under the broad principles of the Clifford case.  The Buck case is very much like the Stein case, relied upon by the respondent.  Although the trusts in both the Stein and Buck cases were long term trusts, a fact not present in the Clifford case, the controlling circumstance in both the Stein and Buck cases is the extent of the donor's control to alter or modify the trust in so far as the beneficiaries of income or corpus are concerned.  In both those cases the grantor had reserved to himself the power to shift the income or corpus from one beneficiary to another as often as he chose, excluding always himself as a beneficiary.  The court in the Buck case said that this was "the outstanding fact" which distinguished that case from , and . The Palmer case, as we have said, was a per curiam opinion by the Second Circuit.  It was decided wholly upon the authority of *1234 The grantor in the Branch case reserved no such powers to alter or amend and neither did petitioner here.  At the time petitioner created the trust he, under clause fifth, placed such powers in a committee of three, which committee has since amended the trust deed so as to forever preclude petitioner from receiving or enjoying any benefit therefrom.  Under the authority given the committee it could even remove petitioner as one of the trustees.  Taking into consideration all these circumstances, we are of the opinion that the instant case is not controlled by the Clifford case or by the Stein case or by the Buck case.  We think the facts in the instant case are more nearly like those involved in , and , than the facts in any of the cases cited above.  We hold, therefore, petitioner is not taxable on the income of the trust under section 22(a).  Decision will be entered under Rule 50.Footnotes1. SEC. 166.  REVOCABLE TRUSTS.  Where at any time the power to revest in the grantor title to any part of the corpus of the trust is vested - (1) in the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom, or (2) in any person not having a substantial adverse interest in the disposition of such part of the corpus or the income therefrom; then the income of such part of the trust shall be included in computing the net income of the grantor.  SEC. 167.  INCOME FOR BENEFIT OF GRANTOR.  (a) Where any part of the income of a trust - (1) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, held or accumulated for future distribution to the grantor; or (2) may, in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income, be distributed to the grantor; or (3) is, or in the discretion of the grantor or of any person not having a substantial adverse interest in the disposition of such part of the income may be, applied to the payment of premiums upon policies of insurance on the life of the grantor (except policies of insurance irrevocably payable for the purposes and in the manner specified in section 23(o), relating tothe so-called "charitable contribution" deduction); then such part of the income of the trust shall be included in computing the net income of the grantor.  (b) As used in this section, the term "in the discretion of the grantor" means "in the discretion of the grantor, either alone or in conjunction with any person not having a substantial adverse interest in the disposition of the part of the income in question." SEC. 22.  GROSS INCOME.  (a) GENERAL DEFINITION. - "Gross income" includes gains, profits, and income derived from salaries, wages, or compensation for personal service, of whatever kind and in whatever form paid, or from professions, vocations, 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.  In the case of Presidents of te United States and judges of courts of the United States taking office after June 6, 1932, the compensation received as such shall be included in gross income; and all Acts fixing the compensation of such Presidents and judges are hereby amended accordingly. ↩