Court Opinion

ID: 4628861
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:04:12.191885+00
Date Added: 2024-06-11T08:00:06.918351
License: Public Domain

S. A. LYNCH, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Lynch v. CommissionerDocket No. 46153.United States Board of Tax Appeals23 B.T.A. 435; 1931 BTA LEXIS 1877; May 27, 1931, Promulgated *1877  The petitioner in 1924 created an irrevocable trust fund for the support and maintenance of his wife and their two children, in contemplation of a divorce, which was obtained later in that year.  The petitioner retained no interest in the trust fund or the income therefrom except a reversionary interest of remote possibility.  Held, that the income from the fund in 1927 is not taxable to the petitioner.  Ward Loveless, Esq., for the petitioner.  E. L. Corbin, Esq., for the respondent.  SMITH *435  The respondent has determined a deficiency in petitioner's tax liability for 1927 in the amount of $9,166.03, all of which is contested by the petitioner.  The greater part of the deficiency results from the inclusion in petitioner's income of an item of $21,000 representing interest accruing in that year on certain securities which were held by the Atlanta Trust Company under an agreement entered into by the petitioner and his wife.  FINDINGS OF FACT.  On June 5, 1924, the petitioner and his wife, Flora P. Lynch, in contemplation of a divorce, which was obtained in Paris, France, in October, 1924, and the Atlanta Trust Company, a Georgia corporation, *1878  entered into an indenture which provided in part as follows: That the said husband, for and in consideration of the premises and in further consideration of the release by the wife of all further claims, rights and interest in his estate, and in consideration of the sum of One Dollar *436  ($1.00) in hand paid to him by the trustee [Atlanta Trust Company], receipt of which is hereby acknowledged, has agreed, and does hereby agree, as follows: 1.  That he will, upon the execution of this agreement, pay, or caused to be paid, to his said wife the sum of Twenty-Five Thousand Dollars ($25,000.00), in cash, and that he will pay, or cause to be paid, to his said wife, during each year, for a period of seven (7) years from October 1, 1924, the net sum of Twenty-five Thousand Dollars ($25,000.00), and thereafter, during each year, for and during the remainder of the life of said wife, the net sum of Twenty Thousand Dollars ($20,000.00), and that payments shall be made in equal quarterly installments, the first payment to be made on October 1, 1924, and a like payment to be made on the first days of January, April, July, and October of each year thereafter.  The agreement further*1879  provided, in so far as the question involved herein is concerned, that bonds and securities in the face amount of $300,000 were to be assigned, transferred and set over to the trustee to be held in trust for Flora P. Lynch, petitioner's wife, and the income therefrom distributed to her.  The indenture provided in this connection: Said trustee shall hold said bonds and any sums of money which may be deposited with it under the terms hereof, and the said trustee hereby agrees so to do in trust for the sole and separate use and benefit of the said wife, and shall collect the entire income derived from said bonds and from any sum of money which may be deposited as hereinbefore provided in this agreement, and shall pay the entire income so collected from said bonds and said sums to the said wife immediately upon the collection thereof * * *.  (Italics supplied.) The petitioner had no right to repossess this property either alone or in conjunction with another, nor did it even revert to him at the death of Flora P. Lynch, for the indenture provided: At the death of the said wife, said trustee shall continue to hold said property, bonds and other funds which may at that*1880  time be in its hands, for the use and benefit of the two children of the said husband and wife, Stephen A. Lynch, Jr. and Jane C. Lynch, said trust property to be divided into two equal parts; and the income derived from one moiety thereof shall be used for the care, support, maintenance and education of said Stephen A. Lynch, Jr., and the income derived from the other moiety thereof shall be used for the support, care, maintenance and education of the said Jane C. Lynch, until such time as said children shall, respectively, arrive at the age of thirty (30) years, at which time said child shall be paid his or her respective part of said trust fund, and as to such child this trust shall thereupon cease and determine; provided, however, that if said children, or either of them, shall die during the life time of said wife or before reaching the age of thirty (30) years, the part so held for said child so dying shall, at the death of the said wife, be returned to the said husband, or to his estate; provided, however, that upon the death of the said wife, any home which may have been purchased for her and the title of which shall be in the name of the trustee, shall be sold, and the proceeds*1881  distributed as the said wife may be will or otherwise direct.  The petitioner had no control over the trustee.  The indenture provided: *437  It is mutually agreed between all of the parties hereto that the wife shall have the right, privilege, power and authority to change the trustee herein named at any time that she may so determine, and may select such other trustee, either in or outside of the City of Atlanta as she may desire; provided, however, before any change of trustee shall be made, a satisfactory agreement shall be made with the proposed trustee as to the fees to be charged for the administration of this trust.  In connection with the substitution of securities the indenture provided: At the maturity of said bonds, the trustee shall collect the entire principal thereof and reinvest the same for the sole and separate use and benefit of said wife, and pay all the income derived from such reinvestment to the said wife as herein provided; but in making such reinvestments, said trustee shall not be bound or required to make such reinvestments in securities designated by law as legal investments for trustees, but may invest the funds coming into its hands in sound*1882  real estate or other securities as will yield a higher rate of income, but always taking into consideration the safety, security and preservation of the fund so invested.  Concurrently with the execution of the aforesaid agreement, the petitioner, on June 5, 1924, deposited with the Atlanta Trust Company 7 per cent bonds of the Atlanta Realty Corporation of the face value of $300,000.  During the years 1925, 1926, and 1927, by consent of all the parties to the agreement, certain of the securities held by the trustee were withdrawn by the petitioner and certain other securities deposited in their stead, so that at all times there were securities of the face value of at least $300,000 held by the trustee.  During the year 1927, the amount of $21,000 representing interest on the said securities was collected by the Atlanta Trust Company and, in accordance with the provisions of the agreement of June 5, 1924, was paid to Flora P. Lynch.  The respondent has included the said amount of $21,000 in the petitioner's taxable income of 1927 in the determination of the deficiency.  OPINION.  SMITH: The petitioner contends that the disputed item of $21,000, representing the interest upon*1883  the securities held by the Atlanta Trust Company, is not taxable to him, but represents income to the trust, which he contends was created by the agreement of June 5, 1924, and that the amount is taxable under the provisions of section 219 of the Revenue Act of 1926.  The respondent contends, first, that no trust was created as alleged, and, second, that, if a valid trust did exist during the taxable year, the petitioner himself was the beneficiary in respect of the income in question and is therefore *438  liable for the tax thereon.  Section 219 of the Revenue Act of 1926 provides in part as follows: (a) The tax imposed by Parts I and II of this title shall apply to the income of estates or of any kind of property held in trust, including - * * * (2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; * * * (b) Except as otherwise provided in subdivisions (g) and (h), the tax shall be computed upon the net income of the estate or trust, and shall be paid by the fiduciary.  The net income of the estate or trust shall be computed*1884  in the same manner and on the same basis as provided in section 212, except that - * * * (2) There shall be allowed as an additional deduction in computing the net income of the estate or trust the amount of the income of the estate or trust for its taxable year which is to be distributed currently by the fiduciary to the beneficiaries, and the amount of the income collected by a guardian of an infant which is to be held or distributed as the court may direct, but the amount so allowed as a deduction shall be included in computing the net income of the beneficiaries whether distributed to them or not.  Any amount allowed as a deduction under this paragraph shall not be allowed as a deduction under paragraph (3) in the same or any succeeding taxable year.  We think that the instrument of June 5, 1924, clearly evinces a trust with respect to the $300,000 face value of securities from which the income in dispute was derived and that Flora P. Lynch and her two children were the only beneficiaries of such trust.  The agreement in question has the appearance of a carefully prepared legal instrument.  It is referred to by the parties as a trust and it contains all of the essential elements*1885  of a valid trust.  A trust is defined in Perry on Trusts, vol. 1, p. 79, as follows: Any agreement or contract in writing, made by a person having the power of disposal over property, whereby such person agrees or directs that a particular parcel of property or a certain fund shall be held or dealt with in a particular manner for the benefit of another, in a court of equity raises a trust in favor of such other person against the person making such agreement, or any other person claiming under him voluntarily or with notice; * * * Undisputably, the legal title to the securities in question passed to the trustee upon execution of the agreement and delivery of the securities to the trustee.  The petitioner retained no interest in or control over the trust fund except a remotely possible reversionary interest.  The substitution of other securities by the petitioner from time to time for some of those held by the trustee with the consent of all parties was not, as the respondent contends, an exercise of control over the trust res by the petitioner, but was presumably a necessary protective measure for the interest of the beneficiaries.  *1886  The respondent in support of his contentions relies strongly upon . In that case the petitioner had *439  agreed to pay a certain amount yearly for the maintenance and support of his wife and had deposited certain securities with a trust company as a guaranty for the agreed payments.  We held that the petitioner was taxable upon the income from the securities.  That case, however, is expressly distinguished from the instant case.  We quote from the opinion: The situation is to be distinguished from one where a trust fund is set up for the benefit of the wife and the husband has no interest in the income from the fund.  The agreement which we are here considering was no more than one for maintenance and support, with collateral deposited as security for the payment.  We are accordingly of the opinion that the interest received from the bonds held under the agreement between petitioner and his wife and the bank constitutes income to the petitioner.  In support of his contention that if a trust did exist here it was for the benefit of the petitioner, the respondent doubtless relies upon the following statement contained in the opinion*1887  of the Welch case: * * * If this agreement can be said to give rise to any trust such as is contemplated by the Revenue Act, the petitioner was the beneficiary thereunder so far as the receipt of income is concerned, for the income was to be applied in payment of his indebtedness.  This dictum has no application to the present case.  The petitioner was in no sense a recipient of any material benefits from the trust fund.  He was no more a beneficiary than is the settlor of any voluntary expressed trust who benefits only in having his purposes served by the trust.  There is nothing to indicate that the petitioner was legally bound to make any payments to his wife prior to the execution of the agreement.  There is a further clear distinction to be made between this case, where a permanent trust fund was voluntarily set aside for the benefit of the wife and children, and , cited by the respondent, where it was held that payments of alimony made by the taxpayer by order of the court did not decrease his taxable income.  We think that the interest on the securities in question for 1927 is taxable as trust income under the provisions*1888  of section 219 of the statute, quoted in part above, and is not taxable to the petitioner.  Judgment will be entered under Rule 50.