Court Opinion

ID: 4484873
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:17:01.867785+00
Date Added: 2024-06-11T14:54:05.235321
License: Public Domain

OPINION. Disnet, Judge: The petitioner’s briefs, in substance, contend that the situation here presented does not fall within the principles enunciated in Helvering v. Clifford, 309 U. S. 331, or Helvering v. Stuart, 317 U. S. 154, but that Kohnstamm v. Pedrick, 153 Fed. (2d) 506, applies, so that the trust income is not taxable to him. The respondent argues that the deduction for rent was properly denied, first, because on May 12, 1941, when the trust instrument and lease were executed, the petitioner did not part with a present interest in the building involved, so that no gift in trust was made; second, because, primarily under Helvering v. Clifford, supra, and Helvering v. Stuart, supra, the petitioner retained such dominion and control over the trust property that the income remained in a family group, leaving him the owner of the property; and, third, because the income from the property was to be used and was used for the support and maintenance of his wife, it is includible in his income as in discharge of his legal obligations. In our opinion, the respondent’s position should be sustained upon the first ground, and we need not consider the application either of Helvering v. Clifford, supra, as to general taxability of trust income to the petitioner, or cases such as the Stuart case, supra, as to income used to discharge legal obligations. We have here a narrower question, to wit, whether or not petitioner is to be allowed deduction of $3,800 as rent paid upon the lease upon the building. In our view, despite the transfer of the title to the building, there was a clear reservation of a lease thereon and the case falls within the ambit of the principles announced in Johnson v. Commissioner, 86 Fed. (2d) 710. See also Marian Bourne Elbert, 45 B. T. A. 685. In the Johnson case the petitioner borrowed $400,000 from a bank and gave his wife a check in that amount. She delivered the check in trust to a trust company, her trust instrument requiring in part that the trustee should make a loan to the petitioner upon his request. He so requested five days later, and the $400,000 was loaned to him upon his agreement to pay to the trust 6 per cent interest. The question was as to the deductibility of the interest by him. The court held, in short, that the petitioner had in fact made no gift to his wife of the $400,000; that it was agreed that the money was to be used in a certain way, that is, placed in trust to be loaned to him; that everything was a part of the same transaction; that he never lost control of the “gift”; and that neither his wife nor the trustee had possession of it free from a duty to return it to him. Therefore, the court said, the gift failed and amounted only to a gratuitous promise to make a gift in the future, so that the interest payments were really gratuities and the deduction thereof was properly disallowed. The facts in this case disclose that the petitioner placed in trust for his wife and children, irrevocably and never to return to him, the title to the building involved here, but considering the trust instrument and the lease executed the same day as part and parcel of the same contract and conveyance, as we must and do, under well settled rules, it appears equally plain that in substance and fact he reserved from such transfer of the title a lease to himself, but was to pay $500 per month to the trustee, for benefit of his wife, for two years, and thereafter up to 20 years to pay an amount set by an arbitrator in case of disagreement between petitioner and the trustee. Assuming, without deciding, that the title to the property passed to the trust, for the wife and children, we can not see in the circumstances before us a passing to the trust of that degree of dominion and control, in praesenti, as to the leasehold estate which is requisite to passage of a gift. Adolph Weil, 31 B. T. A. 899, and citations therein. The petitioner had complete control, for at least the first two years, of the leasehold. He “never lost control.” Preston v. Commissioner, 132 Fed. (2d) 763. We decline to view the facts before us as indicating a transfer of title to the trust, and then a lease by the trust to the petitioner. By the trust instrument he reserved right to a lease; and it was executed the same day. We should not close our eyes to reality; and the reality is that the $500 rental for two years was a part of the transaction between petitioner and the trust on May 12,1941. The $500 rental can not realistically be viewed as set by anyone but the petitioner, while setting up the trust. Thus there emerges the same mere promise to make a gift of $500 a month for two years as was the promise to pay “interest” in the Johnson case. The petitioner is seen to have reserved from the transfer in trust a leasehold estate, carved out of the fee, promising to pay the trust for his wife or children $500 a month. The leasehold estate in truth will pass to the trust only at the end of the lease, and the rentals appear as mere payments to the trust, promised for the future. We need not in this case, involving the first year, consider the situation after the two-year period — though there again it is obvious that the petitioner was largely in control, for if the rent was not satisfactory to him, an arbitrator, and not the trustee, could set it, and, since the rental money was to go to petitioner’s wife or children, the petitioner was not greatly interested in the amount. He would not feel himself materially poorer by paying a higher rent. In addition, the elements of control over sale, mortgage, or exchange of the property, retained to the petitioner by the trust instrument, emphasize the lack of the necessary elements of gift of the leasehold so as to justify deductions for rent. The petitioner, as owner of the property and settlor, could have reserved to himself the lease, with no rent payable. The arrangement to pay $500 a month to the trustee, for benefit of his family, thus appears as “gratuitous payments,” as the interest is called in the Johnson case, and not a real payment of deductible rent. The principle of the Johnson case applies and we hold that the $3,800 was not a deductible expense. This conclusion renders discussion of other arguments unnecessary. Reviewed by the Court. Decision will he entered for the respondent.