Court Opinion

ID: 4628456
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:03:24.15805+00
Date Added: 2024-06-11T07:57:12.731671
License: Public Domain

Peter B. Barker, Petitioner, v. Commissioner of Internal Revenue, RespondentBarker v. CommissionerDocket No. 55171United States Tax Court25 T.C. 1230; 1956 U.S. Tax Ct. LEXIS 244; March 14, 1956, Filed *244 Decision will be entered for the respondent.  Trusts -- Accumulated Income -- Sec. 167, I. R. C. 1939.  -- Petitioner when 21 years of age created an irrevocable trust to terminate after 14 years at which time the corpus and accumulated income were to be distributed to him.  If he died before termination the corpus and accumulated income were to go to his wife and his issue; if none survived him, then to his father and mother who were co-trustees with an incorporated trust company.  The trustees were to pay certain amounts of income to petitioner annually with the provision also that the trustees in their discretion could pay accumulated and undistributed income to petitioner in the event he was in need of funds because of accident, sickness, etc., or if in their judgment the petitioner should be in need of funds.  Held, the trustees had no substantial interest in the disposition of the income.  Held, further, the accumulated income was taxable to petitioner under section 167, I. R. C. 1939.  Edward B. Lucius, Esq., for the petitioner.Andrew Kopperud, Jr., Esq., for the respondent.  Tietjens, Judge.  TIETJENS*1231  The Commissioner determined the following deficiencies in income tax against petitioner:YearDeficiency1949$ 1,342.9319502,504.9719512,323.84The only issue before us is whether or not the Commissioner properly included in petitioner's gross income for the taxable years certain income of the Peter B. Barker Trust under section 22 (a) or section 167 of the Internal Revenue Code of 1939.FINDINGS OF FACT.Part of the facts have been stipulated, are so found, and*246  the stipulation and attached exhibits are included herein by reference.Petitioner is an individual residing in Chicago, Illinois.  His income tax returns for the years in question were filed with the collector of internal revenue for the first district of Illinois.Petitioner became 21 years of age on January 8, 1949.  At that time he had had no business experience, was single, physically fit, and subject to draft into the Armed Forces of the United States.  He had little appreciation of "what a dollar was worth."Petitioner was drafted into the armed services of the United States in August 1950.  He served in Korea and was wounded in the fall of 1952.  Prior to his induction, his father, Lewis Barker, talked with him about the creation of a trust for the purpose of conserving his assets until he became more mature and could "hold onto his money."As a result of these talks petitioner on January 10, 1949, executed and delivered as donor an indenture of trust in which the City National Bank and Trust Company of Chicago, Lewis Barker, and Winifred G. Barker, his mother, were designated as trustees.  The trust was designated the Peter B. Barker Trust.Pursuant to the trust indenture*247  petitioner delivered and assigned to the trustees certain properties consisting primarily of shares of stock, his interest in another trust, and life insurance policies on his own life *1232  and that of his father.  The trust indenture, inter alia, contained the following provisions:1. It recited that the donor (petitioner) has arrived at the age of 21, has come into the possession of substantial property and is desirous of conserving his property and a substantial portion of the income thereof until such time as he shall have had sufficient business experience to adequately handle and manage the same.2. The trust was to continue until January 8, 1963, at which time, in the event the donor was still living, the trust was to terminate and the trustees were to deliver over to the donor all of the trust corpus and all the accumulated and undistributed income thereof.3. In the event the donor should marry and die prior to January 8, 1963, leaving a wife and issue, or leaving issue only surviving, the trust was to continue for the benefit of his wife and issue or for the benefit of the issue only until such issue attained their respective majorities at which time the trust *248  estate was to be distributed by the trustees to the wife or child then living.4. In the event donor should die prior to January 8, 1963, leaving neither wife nor issue surviving, the corpus and accumulated and undistributed income of the trust estate was to be distributed to Lewis Barker and Winifred G. Barker, or the survivor of them.  The trust document further provided that in the event neither Lewis Barker nor Winifred G. Barker was then living, distribution should be made to the brother and sister of the donor.5. The trust document further provided that yearly payments should be made to the donor in each of the years of the trust in sums ranging from $ 1,800 per year, the first year of the trust, to $ 3,000 due in the fifth year and in each subsequent year of the trust.  Also that if, because of accident, sickness or other emergency, or unusual condition of any kind presently unforeseen, or, if in the judgment of said trustees the donor should be in need of funds in addition to the net income payable to him pursuant to the foregoing provisions, the trustees may, out of the accumulated and undistributed income of the trust estate, pay to the donor for his own use and benefit *249  such sum or sums as in the absolute and uncontrolled opinion of the trustees shall be reasonably sufficient to relieve the need then felt.  The trustees were also to pay to donor after the first 3-year period all income earned on accumulated and undistributed income.6. The trust instrument provided for broad managerial powers on the part of the trustees.7. It was also provided that the trust was irrevocable.  However, the trust could be altered or amended by a written memorandum executed both by donor and the trustees in order to provide for such matters as the designation of successor trustees or the powers of investment *1233  of the trust funds.  The gifts and distributions of income or corpus as outlined in the trust instrument could not be changed or amended.The Peter B. Barker Trust filed fiduciary income tax returns for the years 1949, 1950, and 1951.Trust income was reported by the trustees for each of the years in question and the income reported by the trustees as distributed to petitioner (including monies paid as premiums on life insurance held in the trust) was reported by petitioner in his income tax returns for each of the years in question.  Income of the trust*250  was reported as follows:194919501951Income less deductions$ 9,093.45$ 12,706.49$ 12,045.74Less: Insurance premiums paid onpetitioner's life$ 607.80$ 607.80$ 607.80Insurance premium paid onthe life of petitioner's father629.60574.80573.50Paid to petitioner1,500.002,075.002,375.00Income from trust reported by petitioner$ 2,737.40$ 3,257.60$ 3,556.30Net income reported by trust6,356.059,448.898,489.44Petitioner did not include in his income the income accumulated by the Peter B. Barker Trust.Commonly used standard mortality tables show that the actuarial probability of a male aged 21 attaining the age of 35 is a minimum of 96.85 per cent and a maximum of 97.3968 per cent.Petitioner was married in March 1954 and at the time of the hearing herein had a wife and child.OPINION.In taxing the accumulated but undistributed income of the trust to petitioner the Commissioner places reliance on the broad terms of section 22 (a) and also on section 167.On the facts of this case, we think the controversy is to be decided on the basis of section 167.  That section provides that when any part of the income of a trust*251 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; ormay, 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; * * *then such part of the income of the trust shall be included in computing the net income of the grantor.Here there is no question about that portion of the trust income which was actually paid over to petitioner or applied to pay premiums on the insurance policies held in trust.  Petitioner included such income *1234  in his returns and paid the tax on it.  The issue here arises with respect to the trust income which was accumulated but not paid over to petitioner.  Is the petitioner also accountable for such accumulated income? We think he is.The corporate trustee as such had no substantial adverse interest in the disposition of the trust income. Neither do we think the other two trustees (the father and mother of petitioner) had a substantial adverse interest in the disposition*252  of the income.  Whether they had such an interest is largely a question of fact.  D. G. McDonald Trust, 19 T.C. 672">19 T. C. 672, affd.  225 F. 2d 621 (C. A. 8), certiorari denied 350 U.S. 965">350 U.S. 965. Here it is true that the father and mother had a possible interest in the accumulated income, but only in the event that petitioner dies before January 8, 1963, and then only if he should die without wife or issue.  The facts show that the actuarial probability that the trust would be terminated by death of petitioner is negligible -- the probability of a male aged 21 attaining the age of 35 being a minimum of 96.85 per cent and a maximum of 97.3968 per cent.  Further, petitioner's parents could take down no accumulated income unless petitioner died before reaching the age of 35 and left neither wife nor issue to survive him.  He has both a wife and a child.  On the facts we hold that petitioner's father and mother had no substantial adverse interest in the trust income. D. G. McDonald Trust, supra.Furthermore, the trustees do have discretion almost without limit to distribute all income*253  of the trust to petitioner.  The trust instrument vests the power to distribute the income to petitioner in the absolute and uncontrolled opinion of the trustees.If, because of accident, sickness or other emergency, or unusual condition of any kind, presently unforeseen, or, if in the judgment of said Trustees, the Donor [petitioner] shall be in need of funds in addition to the net income payable to him [otherwise under the instrument] * * *Under somewhat similar circumstances this tribunal has held trust income to be taxable to the grantor although undistributed, under sections 166 and 167.  In Mary E. Wenger, 42 B. T. A. 225, affd.  127 F. 2d 523 (C. A. 6), the terms of the trust provided for distribution of income in the event of "any accident, sickness, calamity, misfortune, adversity, bereavement or loss, financially or otherwise, shall visit * * * the maker * * *." In holding the income taxable to the grantor of the trust we saidThe so-called contingencies, "any accident, sickness, calamity, misfortune, adversity, bereavement or loss, financially or otherwise", the occurrence of one of which gives rise to the right*254  to call for distributions from the trust, are so broad and all-embracing that the use and enjoyment of the income and, if necessary, the corpus by petitioner, is, for practical purposes, almost as complete as if she had retained title to the property.  Petitioner has merely set aside in the hands of a trustee an amount of her excess capital to be held and accumulated as a protection to herself and her children against a "rainy day." These named contingencies *1235  permit her, if she cares to do so, and secures the acquiescense of the trustee, to cause the expenditure of the income, and if necessary the corpus, for the needs for which she would normally have used and expended the property had no trust been created. * * *The fact that the grantor, under the terms of the trust in the Wenger case was required to make a written request for income to take care of the above contingencies made no difference.  See also Helvering v. Evans, 126 F. 2d 270 (C. A. 3), reversing 42 B. T. A. 851, and Commissioner v. Willson, 132 F. 2d 255 (C. A. 6), reversing 44 B. T. A. 583.*255 Petitioner contends that if we hold as above indicated it is tantamount to holding that petitioner is taxable with income which is income of the trust and which is not income of petitioner, and accordingly that the Fifth and Fourteenth Amendments of the Constitution are violated.  We find no merit in this contention.Petitioner also makes the point that there is nothing in the record to indicate that the trust in question was set up to avoid taxes.  But even if this is so petitioner cannot thus avoid the incidence of the statute which we think plainly charges him with taxes on the accumulated income of the trust.  Helvering v. Evans, supra.Our view of the case makes it unnecessary to discuss the applicability of section 22 (a) or of the Clifford doctrine.Decision will be entered for the respondent.