Court Opinion

ID: 4629340
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:05:11.74167+00
Date Added: 2024-06-11T07:57:21.516802
License: Public Domain

FRANK TURNER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Turner v. CommissionerDocket No. 55190.United States Board of Tax Appeals28 B.T.A. 91; 1933 BTA LEXIS 1192; May 11, 1933, Promulgated *1192  Deposit of stock with trustees under a separation agreement held to be deposit of collateral to insure performance of petitioner's obligations under the contract, and not an irrevocable transfer of title and ownership of the stock.  Held, further, that the dividends thereafter paid on the stock, although received by the trustees, were income to petitioner.  Jefferson Armstrong, Esq., and W. D. Zirkle, C.P.A., for the petitioner.  Philip A. Bayer, Esq., for the respondent.  GOODRICH *91  In this proceeding petitioner challenges respondent's determinations of deficiencies in income taxes of $265.25 for the year 1928 and $696.43 for 1929, asserting not only that the determinations of deficiencies are erroneous, but that he has already overpaid his true tax liability for each of those years.  The sole issue is whether respondent erred in including in petitioner's income for each of the years before us the dividends paid upon certain stock held by trustees appointed under a separation agreement between petitioner and his wife.  FINDINGS OF FACT.  Petitioner, a resident of New York City, experienced domestic difficulties and in 1928 his*1193  wife, Mary Turner, brought suit for divorce.  While the suit was pending, and after negotiations between the parties through their attorneys, petitioner, Mary Turner, and certain individuals named as trustees, entered into a "stipulation, agreement, and indenture of trust" under date of June 27, 1928.  *92  Immediately thereafter petitioner delivered to the trustees certificates representing 200 shares of Class B stock of the Managers Security Corporation, also power of attorney to transfer the stock and an order directing that the dividends on the stock be paid to them.  Thereafter in 1928 the trustees received as dividends upon this stock $27,000, of which they paid $10,000 to Mary Turner and the balance to petitioner.  During 1929 the trustees received as dividends $102,000, of which they paid $15,000 to Mary Turner and the balance to petitioner.  In December 1929, the individual trustees resigned and the Wilmington Trust Company of Wilmington, Delaware, was substituted for them.  The stock certificates were delivered to the Trust Company, which still retained them up to the date of trial of this proceeding (October 6, 1932) although the reason for its possession of them subsequent*1194  to April 30, 1932, is not disclosed by the record.  The "stipulation, agreement, and indenture of trust" mentioned above is in evidence and is incorporated by reference in our findings of fact.  For the purposes of this report it is necessary only to out-line the provisions bearing on the issue here raised.  Its principal object was to effect a settlement between the Turners which would dispose of all questions between them arising out of the marriage relation concerning financial and property matters, including dower, inheritance, maintenance, and the costs incident to the divorce.  Its "main plan and chief purpose" was to establish a trust fund of $400,000, the earnings from which would provide Mary Turner during her life with an annual income of $20,000, and which would be subject to disposition upon her death, either by her will or by intestacy distribution to her heirs.  That fund in cash was to be supplied and deposited with the trustees by petitioner.  However, it was not demanded that petitioner immediately put up the money.  He was permitted to deposit in lieu of the money the above mentioned stock "which is to be returned to him when he deposits said sum of money with said*1195  trustees." At the time this stock was covered by an inrrevocable option, extending until May 13, 1930, permitting General Motors Corporation to purchase all or any part of it on an agreed basis.  Petitioner agreed to deliver this stock to the trustees immediately and to "assign and transfer" it to them "insofar as lies within his power and insofar as may be politic and expedient without endangering or affecting the validity of said stock holdings." The trustees were empowered to collect the dividends on the stock and to pay $5,000 thereof each quarter to Mary Turner and the balance to petitioner.  Should the dividends be less than $5,000 each quarter, petitioner was to make up the deficiency to the trustees so that Mary Turner should receive her $20,000 each year.  The agreement required that petitioner pay to the trustees the sum of *93  $400,000 on or before April 30, 1932, and, upon payment, the trustees were bound to return, and petitioner bound to accept, the redelivery to him of the stock.  Upon similar terms, the agreement provided for the redelivery of one half the stock upon deposit of one half the fund.  After deposit and redelivery, neither the trustees, nor Mary Turner, *1196  "shall have any claim, lien or right to or upon said stock" or dividends thereon.  The trust was to terminate upon the death of Mary Turner.  In event her death occurred before petitioner had deposited the $400,000, he was required to make payment in full within one year after her death so that the fund might be distributed under her will or to her heirs.  If for any reason the trust might be declared invalid, it was provided that Mary Turner nevertheless should have a vested life estate in the fund, with full right of disposal of it at her death and the use of the income from it for her life, and petitioner was required to pay forthwith the $400,000 to her, if he had not already done so, whereupon the stock was to be "re-delivered, surrendered and assigned" to him.  It was provided also that if, before Turner had made deposit of the fund, the value of the stock should fall below $500,000, he should transfer and assign to the trustees, as additional collateral, securities of sufficient market value to make up the deficiency "so that there will always be in the possession of said trustees securities of the market value of at least $500,000 for securing the performance of the obligations*1197  in this agreement contained." The agreement made no provision for the ultimate disposition of the stock by the trustees should petitioner fail to deposit the money as required.  Respondent in arriving at his deficiency determinations has included in petitioner's income for the years 1928 and 1929 the total amount of dividends paid upon this stock in each of those years.  OPINION.  GOODRICH: The sole issue here is, Who was the taxable recipient of the dividends paid upon the stock deposited by Turner under the separation agreement, or, in other words, who was the owner of the stock?  Petitioner contends that the stock belonged to the trust, in fact, was the corpus of the trust, and, consequently, that the dividends thereon, at least that part of them paid to Mary Turner, should be taxed to the trust.  Respondent determined and maintains that the stock was Turner's, and the dividends likewise.  Since the parties agree that everything concerning the deposit of the stock was done in accordance with the agreement and that the ownership of the stock will be disclosed by and must be determined under the provisions of the agreement, we need not look beyond it to discover their *94 *1198  intentions respecting the stock, the effect of their acts, and the determination of the issue herein.  After a careful analysis of the instrument it is our opinion that the stock was Turner's.  The agreement clearly indicates that it was not intended that ownership of the stock should be transferred to the trustees or that the corpus of the trust, so far as Turner was concerned, should be anything other than $400,000 in cash.  The provisions relating to deposit of the stock, and the acts done in accordance therewith, were no more than the usual posting of collateral to assure the performance of the obligations assumed by one of the contracting parties, and neither evidenced the intention nor accomplished the result of irrevocably divesting Turner of title to his property.  Moreover, we doubt whether Turner would have been permitted to accomplish that result had he so desired, for at that time the stock was covered by an irrevocable option of purchase previously given by Turner of the General Motors Corporation and perhaps he was not free to alienate it.  But, aside from that, the instrument, by frequent reiteration, makes indisputable the fact that its main purpose, from the standpoint*1199  of Mary Turner, was to insure to her a stated annual income for life, derived from a fund of $400,000 to be set up by cash for that purpose, and hers to dispose of upon her death.  The promise on the part of Turner to accomplish that purpose furnished the consideration for the relinquishment by his wife of her marital property rights.  The corpus of the trust in the first instance was to be the money, not the stock, as is shown by the following language of the contract: As and when received by them from (Turner) the trustees shall control and possess said fund of $400,000.00 for and during the life of (Mary Turner) BUT UPON TRUST NEVERTHELESS, and wholly as the corpus of the trust hereby created.  [Italics supplied.] As we see it, the deposit of the stock was required only as collateral to secure the supplying of the fund and the payment of the annual income to Mrs. Turner until such time as it might be derived from the invested corpus of the trust - a view which is borne out by the provisions relating to the deposit of further securities "as additional collateral" in event of a shrinkage in value of the stock. *1200  There was nothing unusual in supplying the trustees with power of attorney to transfer the stock (whether they used it is not disclosed) and with a dividend order.  Those things, in view of the provisions relating to redemption and recovery of the stock, do not evidence an irrevocable transfer of ownership.  We conclude that the stock remained Turner's and the dividends paid thereon belong to him.  Cf. . Nor can he escape tax on that part of the dividends paid by the trustees to Mary Turner.  He was personally obligated to supply her with an income each year, and it is *95  immaterial whether that obligation was discharged by payment directly by him or by the trustees on his behalf.  . Reviewed by the Board.  Judgment will be entered for the respondent.SMITH SMITH, dissenting: I believe that the majority opinion reaches an erroneous result, largely through its failure to give a proper construction to the trust agreement.  In substance, the opinion holds that the agreement was nothing more than a promise on the part of the petitioner to provide*1201  an annual income of $20,000 for his wife and, at some future time, to create a trust fund of $400,000 for this purpose and immediately to post collateral in the form of certain shares of stock as security for such promises.  By its express terms, however, the agreement is declared to be a final and definite settlement of all property matters between the petitioner and his wife.  It declares primarily for the establishment of an irrevocable trust fund of $400,000 out of which the income to the extent of $20,000 annually was to be paid to the petitioner's wife and the balance, if any, paid to the petitioner.  The principal sum was to be disposed of ultimately by the petitioner's wife and on no condition was any part of it ever to revert to the petitioner.  If, under this agreement, the petitioner had deposited the $400,000 cash with the trustees, clearly he could not be held taxable upon the income thereof except as to such part of the income as was payable to him as a beneficiary of the trust.  Section 161 of the Revenue Act of 1928; *1202 . However, in accordance with a further express provision of the agreement, the petitioner, instead of putting up the $400,000 in cash, deposited with the trustees "in lieu thereof" certain securities of a value in excess of that amount, which securities were to be returned to him upon his payment of $400,000 in cash to the trustees and which, in the meantime, were to be held "IN TRUST, NEVERTHELESS," for the same "uses and purposes" and subject to the same "conditions and restrictions" as would have been the $400,000 in cash.  Can it be said that the provision of the trust instrument giving the petitioner the right, or his exercise of the right, to substitute securities of equal or greater value for cash as the trust corpus, rendered the trust invalid, or, as stated in the majority opinion, can it be said that "the provisions relating to deposit of the stock, and the acts done in accordance therewith, were no more than the usual posting of collateral to assure the performance of the obligations assumed by one of the contracting parties, and neither evidenced the intention nor accomplished the result of irrevocably divesting Turner of title*1203  to his property"?  *96  It seems to me that these securities were clearly impressed with the trust and were no longer the property of the petitioner.  At most, the petitioner merely possessed the right to reacquire them upon payment of $400,000 in cash to the trustees.  I think it error to hold that the petitioner is taxable upon the income of such property as the owner thereof.