Court Opinion

ID: 4622290
Source: CourtListenerOpinion
Date Created: 2020-11-21 02:49:05.533568+00
Date Added: 2024-06-11T07:56:09.958892
License: Public Domain

Robert S. Bradley, Petitioner, v. Commissioner of Internal Revenue, RespondentBradley v. CommissionerDocket No. 110186United States Tax Court1 T.C. 566; 1943 U.S. Tax Ct. LEXIS 237; February 11, 1943, Promulgated *237 Decision will be entered under Rule 50.  Petitioner created identical trusts for each of his three daughters. The income from the trusts was to be paid to his daughters for life and on their death to their issue.  Ultimately the corpora were to go to petitioner's grandchildren at certain ages.  If there were no issue of any of the daughters surviving, one-third of the corpus of each trust was to go to petitioner's next of kin, one-third to Harvard College, and one-third as the last surviving daughter of petitioner should appoint by will, and in default of appointment, to petitioner's next of kin. In any event the trusts were to terminate 21 years after the death of the last surviving child of petitioner, the corpora then to be distributed to the persons to, or for, whom the net income should then be payable.  During the taxable years the trustees were petitioner's lawyer, broker, and bookkeeper, respectively.  Under the terms of each trust the trustees could revoke, alter, and amend, but not to the benefit of petitioner without the consent of the primary beneficiary or a person having a substantial interest in the disposition of the corpus or income of the trust.  In their discretion*238  the trustees could distribute income to the beneficiaries or withhold it.  Income retained by the trustees for six months after the end of the calendar year in which it was collected was to be added to the principal.  The trustees were given broad powers of investment and management.  Held, income from the trusts during 1935 and 1936 was not taxable to petitioner under sections 22 (a), 166, or 167 of the Revenue Acts of 1934, and 1936.  Robert G. Dodge, Esq., for the petitioner.James T. Haslam, Esq., for the respondent.  Van Fossan, Judge.  VAN FOSSAN *566  In his notice of deficiency respondent determined deficiencies in income taxes against petitioner for the calendar years 1935 and 1936 in the respective amounts of $ 70,600.23 and $ 165,565.98.  Subsequently in his amended answer respondent prayed that the net income for the years 1935 and 1936 on which these deficiencies were based be increased by the respective amounts of $ 8,048.59 and $ 12,010.71 and that the deficiencies be increased accordingly.  The first question is whether petitioner is taxable under sections 22 (a), 166 or 167 of the Revenue Acts of 1934 and 1936 on three trusts, of which he was the *239  grantor, for the benefit of his three daughters. The second question concerns the deductibility of trustees' expenses incurred in connection with the trust.FINDINGS OF FACT.Certain facts are stipulated and as so stipulated are adopted as findings of fact.  In so far as material to the issues they are substantially as follows:*567  Petitioner was born February 22, 1855, and at the time of the creation of the three trusts, was a widower with three daughters, namely, Rosamond, born in 1888, Leslie, born in 1890 and Frances, born in 1895.  Rosamond was married to Charles A. Rheault on March 19, 1923, and has three children, born in 1924, 1925 and 1928, respectively.  She and her husband lived in Canada from April 1923 to September 1923 and since then have had various homes in the United States.  Leslie was married to Roger W. Cutler on December 14, 1912, and has four children, born in 1913, 1916, 1918, and 1919, respectively.  Since 1915 she has owned and lived in a house in Needham, Massachusetts.  She and her husband were divorced in Reno in 1928 and in Massachusetts in 1931.  Frances was married to Talbot C. Chase on April 21, 1919, and has three children, born in 1920, 1922, *240  and 1928, respectively.  Since the time of her marriage she and her husband have lived together in their own homes in Boston except for the winter 1923-1924, when they lived with petitioner in Boston.  During various summers they lived with petitioner at his summer residence at Prides Crossing, Massachusetts, until 1929, when they acquired a summer residence at Manchester, Massachusetts, where they have since lived in the summers.  Frances died suddenly on April 13, 1940.At the time of the creation of the three trusts petitioner was in good health and actively engaged in business as chairman of the board of directors and the executive committee of the American Agricultural Chemical Co.  He owned a house in Boston and a summer residence at Prides Crossing, each of which he has ever since owned and maintained.  So long as he continued in business he spent much of his time in New York.  In August 1929, on account of advancing years and decreasing vigor, he retired from business.  A few weeks later he had a nervous breakdown and was in a sanitarium in Beacon, New York, until September 1930, and again for four months in the winter of 1930-1931 and for a month in the winter of 1932.  Thereafter*241  he traveled much.  He was in Europe from April to August 1932, in California for the winter of 1932-1933, in Europe again in the fall of 1933, since which time he has lived at his residence in Prides Crossing during the summers and has spent the winters in the south, with periods at a hotel in New York City on the way south and north.The approximate value of the assets of each of the trusts for the benefit of Rosamond and Frances was $ 1,450,000 at the time of their creation.  The approximate value of the assets of the trust for the benefit of Leslie was $ 440,000 at the time of its creation.  On May 7, 1934, the assets of the latter trust were increased by approximately $ 1,570,000 received from another trust on its termination.  The approximate value of petitioner's remaining property after the creation of the three trusts was $ 4,000,000.*568  The taxable net income and nontaxable income of the trusts reported by the beneficiaries and trustees for the taxable years was as follows:Rosamond Rheault Trust19351936Net income$ 86,756.70$ 177,150.40Nontaxable income42,981.0940,101.2543,775.6177,049.15Reported by Rosamond Rheault18,440.1323,737.92Reported by trustee25,335.4853,311.2343,775.6177,049.15Leslie B. Cutler TrustNet income$ 64,723.33$ 80,539.00Nontaxable income24,794.2822,484.6239,929.0558,054.38Reported by Leslie B. Cutler19,480.5822,555.22Reported by trustee20,448.4735,499.1639,929.0558,054.38Frances B. Chase TrustNet income$ 83,301.84$ 109,845.32Nontaxable income37,603.0629,903.6445,698.7879,941.68Reported by Frances B. Chase19,334.7327,903.12Reported by trustee26,364.0552,038.5645,698.7879,941.68*242  Each of the three daughters, since the creation of the trusts, has been almost entirely dependent upon the income of her trust for the living expenses of herself and her family, the husband of each having had no substantial income from investments and having earned only relatively small amounts in proportion to the living expenses of himself and family.  Prior to the creation of the trusts the daughters were in receipt of sizeable incomes from sources provided by petitioner and not available after the creation of the trusts.The trusts for the primary benefit of each of his daughters were created by petitioner on March 17, 1923.  The three trusts are identical except for the names of the primary beneficiaries.The original trustees in each case were petitioner, his daughter, Rosamond, and Robert B. Stone.  Each of the trust instruments provides, inter alia, that the trustees shall "pay, subject to other provisions hereof, the net income thereof to and for the benefit of" the daughter during her life and on her death, leaving issue, to and for the benefit of her issue.  If she leaves no issue the net income goes to the other daughters and their issue and ultimately the corpus goes*243 *569  to the issue of the daughters at certain ages.  If, on the death of the last survivor of all of petitioner's children, no issue of any of them survive, the corpus goes as follows: One-third to the next of kin of petitioner, one-third to Harvard College, and one-third as the last surviving daughter of petitioner shall by will appoint, and in default of appointment, to the next of kin of petitioner.  The trust terminates 21 years after the death of the last surviving child of petitioner, the corpus then to be distributed to the persons to or for whom the net income shall then be payable.The trustees are not required to make payments directly to any beneficiary, but in their discretion may apply income for the benefit of a beneficiary or may accumulate it and thereafter pay it to or apply it for him or her or continue to hold it.  Any accumulated income at the time of the death of the beneficiary is to become part of the principal.Any income retained by the trustees for six months after the end of the calendar year in which it is collected and not specifically reserved for some previously incurred expense or obligation other than payment to or for the benefit of any beneficiary*244  is to be added to the principal.The trustees are empowered by the trust instruments to make distributions of securities or investments in their hands at such valuations as they deem fair, to hold any property whether or not it is an investment legally authorized, to hold nonproductive property, to hold a larger portion of one investment than a trust estate may ordinarily hold, and to hold the whole or any part of the trust fund in unregistered bonds, shares of stock, or of voluntary associations standing in the names of other persons and duly endorsed for transfer.  The trustees are not required to withhold any income to make good any premium paid on investments or depreciation of any part of the estate.  The trustees are empowered to sell at public or private sale any securities or investments composing the trust fund and to employ agents to perform acts and duties on their behalf.  Each trustee is liable only for his own willful neglect and default.The original trust instruments also provided as follows:The foregoing declaration of trust, and all the terms, provisions and trusts therein contained, are hereby nevertheless made and declared on the express condition, and with the*245  express reservation that all the trustees thereunder acting together so long as said Robert S. Bradley shall be alive, shall at all times, notwithstanding anything hereinbefore contained, or anything done hereunder, have full right, power and authority to revoke and cancel this declaration of trust, or add to, alter, or amend any or all of the provisions, terms or trusts thereof, and that thereafter the trust fund and all accumulated income then on hand, if any, shall be held and managed in accordance with such revocation, amendment, alteration or addition.*570  On September 29, 1924, the trusts were amended to provide that thereafter the power to revoke or amend was vested in the trustees or trustee other than petitioner.On February 25, 1929, petitioner's daughter Rosamond and Robert B. Stone as trustees, amended the trusts to confer upon the trustees power to employ a bank as custodian of trust funds, to appoint a bank as trustee and to employ investment counsel.On February 26, 1929, Rosamond Rheault resigned as trustee and the remaining trustees appointed Walter N. Stillman of New York City as trustee in her place.On June 2, 1932, Walter N. Stillman and Robert B. Stone, *246  as trustees, amended the trust instrument by replacing the provision relative to the power of the trustees to revoke or amend with the following provision:The foregoing Declaration of Trust and all terms, provisions and trusts therein contained are hereby nevertheless made and declared on the express condition and with the express reservation that the trustees or trustee thereunder, other than said Robert S. Bradley and always excluding him, so long as said Robert S. Bradley shall be alive, shall at all times, notwithstanding anything hereinbefore contained or anything done hereunder, have full right, power and authority to revoke and cancel this Declaration of Trust or to add to, alter or amend any or all of the provisions, terms or trusts thereof and that thereafter the trust fund and all accumulated income then on hand, if any, shall be held and managed in accordance with such revocation, amendment, alteration or addition; provided always that no revocation, amendment, alteration, or addition shall give any beneficial interest to said Robert S. Bradley or shall operate to revest in him title to any part of the corpus of the trust unless such revocation, amendment, alteration or*247  addition shall be assented to in writing by said Rosamond B. Rheault, or by some other person having a substantial interest in the disposition of the corpus of the trust or the income therefrom.On March 14, 1934, petitioner resigned as trustee and Fred M. Montgomery of Swampscott, Massachusetts, was appointed in his place.Of the trustees, Robert B. Stone has been petitioner's lawyer for many years; Walter N. Stillman, a member of a firm of stockbrokers in New York City, had acted as broker for petitioner; and Fred M. Montgomery has been petitioner's private secretary for forty-two years.  Since 1934 Stone has seen petitioner only nine or ten times, but concerning matters unrelated to the trusts.  Petitioner has not been in Montgomery's office since 1934.  Since petitioner's resignation as trustee, the trustees have been entirely independent in the management of the trusts.  They determine without consulting petitioner what shall be paid annually to the beneficiaries based upon a knowledge of the needs of the beneficiaries.*571  The amendment to the trusts made in June 1932 was adopted by the trustees, Stone and Stillman, without any communication with petitioner, who was in*248  Europe at the time.On November 24, 1924, petitioner, a widower, created a trust for the benefit of Lavinia H. Newell, a sister of petitioner's first wife, with the same trustees as served the trusts in question.  In 1927 this trust was amended by trustees Rosamond Rheault and Robert B. Stone, whereby Lavinia H. Newell was removed as beneficiary and Florence S. Bradley, petitioner's second wife, was substituted in her place.  With the exception of an amendment on January 24, 1933, the amendments, resignations, and appointments of trustees in connection with this trust were in all respects the same as those in connection with the trusts for the benefit of petitioner's daughters. In 1932 petitioner and Florence S. Bradley separated.  In January 1933 Florence S. Bradley signed a separation agreement and signed a release of all her interest in the trust.  In return Florence S. Bradley was paid $ 400,000 by petitioner.  On January 24, 1933, this trust was amended by trustees Stone and Stillman, substituting Lavinia H. Newell as the primary beneficiary in place of Florence S. Bradley.  This amendment was made without consultation with petitioner, who had gone to California.  Thereafter*249  the trust fund was held for the benefit of Lavinia Newell until her death in 1934, when the fund, then amounting to $ 1,570,000, was added to the trust for the daughter Leslie.OPINION.The first issue is whether income of the three trusts which petitioner created for the benefit of his three daughters is includible in his gross income for the years 1935 and 1936.  Petitioner contends this income is not so includible under sections 166 or 167 of the Revenue Acts of 1934 and 1936, since, under provisions of the trusts, no part of the corpora or income therefrom could be revested in him without the consent of persons having substantial adverse interests.  He also argues that the income is not taxable to him under section 22 (a) because petitioner, after the creation of the trusts, did not continue to be the real owner of the property.  Respondent claims that, because of the powers in the trustees to alter, amend, or revoke, the income is taxable to petitioner. He further interprets the provisions of the trusts to mean that the trustees could revest title to the trust funds in petitioner without the consent of persons having substantial adverse interest.We do not agree with respondent*250  that the trust income is taxable to petitioner under sections 166 or 167.  Each of the trusts as amended on June 2, 1932, provided that the trustees, other than petitioner, *572  could revoke, alter, or amend the trusts, but not so as to benefit petitioner unless such a benefit was assented to by the primary beneficiary or "some other person having a substantial interest in the disposition of the corpus of the trust or the income therefrom." Respondent's argument that the primary beneficiaries did not have a substantial adverse interest can not be sustained.  A study of the trust instruments reveals that petitioner's first purpose in creating the trusts was to provide for his children, the primary beneficiaries. The trustees themselves recognized this purpose by actually distributing income to the children in accordance with their needs.  We believe, therefore, that the respective primary beneficiaries had a substantial interest in the income of the trusts, and consequently the corpora thereof, which was adverse to that of petitioner.  In this respect the case is distinguishable from , wherein no interest*251  under a trust could go to the grantor on revocation or amendment to the trust without the consent of his wife.  The Circuit Court of Appeals for the First Circuit pointed out that the wife did not have a substantial adverse interest because the main objective of the trust was to benefit the grantor's children, not his wife, although distribution of accumulated income might, in the discretion of the trustees, have been made to the wife.  See .Respondent contends that title to the trust principal could have been revested in petitioner on the consent of some person who did not have a substantial adverse interest by reason of the language, "some other person having a substantial interest in the disposition of the corpus of the trust or the income therefrom." The only persons other than the primary beneficiaries having a substantial interest in the corpus or income of the trust were the issue of the primary beneficiaries. The fact that such issue were contingent beneficiaries does not prevent their interest from being substantial.  . Since a return of the corpora*252  to petitioner would prevent the ripening of the contingent benefits given them under the trusts, we believe their interests were adverse to that of petitioner, within the meaning of that term as employed in sections 166 and 167.Accordingly, we hold that neither the corpora nor the income of the trusts could redound to the benefit of petitioner without the consent of persons having a substantial adverse interest. Therefore, the income therefrom is not includible in petitioner's gross income under sections 166 or 167.Respondent also contends that the income from the trusts is includible under section 22 (a) of the Revenue Acts of 1934 and 1936.  The answer to this question depends on whether, as a matter of law, *573  petitioner ceased to be the substantial owner of the corpora after the trusts had been created.  . In the latter case the Supreme Court, in discussing the facts peculiar to that case, concluded that:* * * the short duration of the trust, the fact that the wife was the beneficiary, and the retention of control over the corpus by respondent all lead irresistibly to the conclusion that respondent*253  continued to be the owner for purposes of § 22 (a).From the above quotation it is clear that the facts in the case at bar are distinguishable from those in the Clifford case.  Here the respective trusts were to continue at least for the lives of the primary beneficiaries; petitioner could not receive any of the benefits of income or principal without the consent of persons with a substantial adverse interest; petitioner retained no control or dominion over the corpora of the trusts or income therefrom; petitioner was not the trustee during the taxable years; and there was no reversion of the principal of the trust to petitioner.  In view of these factors we do not believe that petitioner was in substance the owner of the corpora of the trusts.  The mere fact that petitioner derived nonmaterial satisfaction out of seeing his children provided for is not sufficient to make him taxable.  .Petitioner in the instant case did more to place ownership of the trust property beyond himself than did the grantor in , wherein the Circuit Court of*254  Appeals for the First Circuit said:* * * Where the grantor has stripped himself of all command over the income for an indefinite period, and in all probability, under the terms of the trust instrument, will never regain beneficial ownership of the corpus, there seems to be no statutory basis for treating the income as that of the grantor under Section 22 (a) merely because he has made himself trustee with broad power in that capacity to manage the trust estate.Respondent argues in effect that the powers possessed by the trustees are attributable to petitioner because the trustees are amenable to the grantor's wishes in all matters pertaining to the trusts.  As proof of this respondent points to the fact that in 1933 the trustees amended a trust identical in all pertinent respects with those before us in order to return Lavinia H. Newell, sister of petitioner's deceased wife, to her place as primary beneficiary, in lieu of Florence S. Bradley, whom petitioner had married in 1927.  We are unable to agree with respondent that this amendment indicated that the trustees were amenable to the grantor's wishes.  The action was taken by the trustees during petitioner's absence and without*255  consulting him.  It is apparent that the trustees removed Florence S. Bradley as primary beneficiary because she herself renounced her beneficial *574  interest in the trust.  Apparently, this renunciation was a condition imposed upon her by a separation agreement between her and petitioner, under which agreement petitioner made a settlement on her of $ 400,000.  By reason of the vacancy left by this renunciation, the trustees on their own motion returned Lavinia H. Newell to her former place as primary beneficiary.Nor is the fact that the trustees were petitioner's attorney, broker, and bookkeeper, respectively, of vital significance.  It is natural that the grantor of a trust will appoint as fiduciaries persons upon whose ability and integrity he may rely.  In the instant case the evidence is that petitioner never expressed to the trustees his wishes as to investment and management of the trusts.  The trustees exercised their own independent judgment with regard to such matters.  Nor is there any evidence on which to base a conclusion that the trustees would have abdicated their functions had petitioner sought to impose his will on them.It may well be argued that it would *256  have been an abuse of the discretionary powers given the trustees under the trust instruments for them to have followed the dictates of petitioner rather than of their own collective judgment.  In the absence of evidence it would be unjustifiable to impute such an abuse to them.  Taking into consideration all of the factors involved in this situation, it is our opinion that petitioner did not remain in substance the owner of the corpora of the trusts within the meaning of section 22 (a).  ; ;; ; and .Respondent places great reliance on , as to the applicability of section 22 (a).  We think that case clearly distinguishable. The basis for the decision there was that petitioner had not placed control of a trust created by him beyond his family circle.  The trustees were petitioner's wife and a family-controlled*257  corporation.  The opinion in that case indicated that the corporate trustee respected the wishes of petitioner as to matters concerning the trust which he had established.  Also upon the written direction of petitioner's wife, the whole trust could have been terminated and the corpus returned to petitioner.  Further, the power of appointment over the corpus, which power was given to petitioner's wife, was confined to petitioner's own descendants.  None of those factors are present here and it is, therefore, obvious that that case is not controlling.Accordingly, we hold petitioner not taxable on the income from the three trusts under section 22 (a).In his amended answer respondent requests that the deficiencies be increased to take into account $ 8,048.59 and $ 12,010.71 of additional *575  income for the years 1935 and 1936, respectively.  These additional amounts represent expenses of management which respondent failed to disallow in his notice of deficiency.  Since the request for additional deficiencies is new matter pleaded in the amended answer, respondent has the burden of proving that these expenses are not allowable.  Respondent has offered no evidence that these expenses*258  were incurred in connection with exempt income.  We, therefore, hold for petitioner as to these items.Decision will be entered under Rule 50.